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Allot Communications Ltd. (NASDAQ:ALLT)

Q4 2012 Results Earnings Call

February 5, 2013 8:30 AM ET

Executives

Jay Kalish - Executive Director, Investor Relations

Rami Hadar - President and CEO

Nachum Falek - Chief Financial Officer

Analysts

Daniel Meron - RBC Capital Markets

Alex Henderson - Needham

Tal Liani - Bank of America

Joseph Wolf - Barclays

Matt Robison - Wunderlich Securities

Catharine Trebnick - Northland Securities

Jay Srivatsa - Chardan Capital Markets

Brent Bracelin -Pacific Crest

Dov Rozenberg - Clal Finance Betucha Brokerage

Sanjit Singh - Wedbush Morgan Securities

Operator

… Please go ahead.

Jay Kalish

Thank you very much. And thank you all for joining us on our Fourth Quarter 2012 Conference Call today. My name is Jay Kalish and joining me today are Allot's President and CEO, Rami Hadar, as well as our Chief Financial Officer, Nachum Falek.

The press release announcing our fourth quarter and full year results is available on the Investor Relations section of our website at www.allot.com. All results and expectations we review on the call are on a non-GAAP basis unless otherwise described as GAAP.

Non-GAAP net income and non-GAAP net income per share excludes the impact of share-based compensation, early repayments of the Israeli Office of the Chief Scientist, revenue adjustments due to acquisitions, expenses related to M&A activity, deferred tax assets and amortizations of certain intangibles. Please note that all earnings per share amounts are on a fully diluted basis.

Before we begin, let me remind you that certain statements made on the call today may be considered forward-looking statements, which reflects management's best judgments, based on currently available information. I direct your attention to the risk factors contained in today's press release and in the Annual Report on Form 20-F, filed by Allot with the U.S. Securities and Exchange Commission.

With that, I would now like to turn the call over to Rami.

Rami Hadar

Thank you, Jay and thank you all for joining us today. During the fourth quarter of 2012 we achieved record non-GAAP revenue level of $28.5 million, which is 2% over the first quarter and 29% over Q4 2011. EPS came in at $0.14 per share, a slight decline over last quarter, mainly due to the full inclusion of outward expenses from the Oversi position. Overall we managed to completely close positions with minimum diluted respect in 2012 and hope they will be one of our growth catalysts in 2013.

Despite the challenging macro environment Allot continued to grow aggressively during 2012. For the year revenues from $77.8 million in 2011 to $107.1 million in 2012, representing 38% growth and EPS increase from $0.46 in 2011 to $0.59 in 2012.

Given the moderate financials and the fact that we elected to repay OCS government grants and ceased to pay 3.5% royalty on revenues, there is a wide difference between GAAP and non-GAAP results.

Now I'll take a few minutes to walk you through these various accounting issues. What the revenue increase does show is that Allot continues to grow market share in its salvage market. We reached an important milestone in the Company's history by exceeding $100 million of revenue in 2012. According to the Strategy Analytics we are the market leader with over 40% market share.

The book-to-bill ratio was below 1 for the quarter. This is mainly due to negative macro conditions in our European region. These macro conditions have recently started effecting spending patterns of our customers in Europe. From a revenue point of view for the fall of 2012 we have EMEA down to 44% from 61%, but roughly flat in absolute terms. APAC grew to 25% of revenue and Americas grew to 31% of revenue with APAC and Americas regions growing 92% and 97% respectively in absolute terms.

During the fourth quarter we did not have any 10% customer which demonstrates healthy customer diversity. For the whole year we have one over 10% mobile service provider customer, which an absolute revenue terms grew by 27% in 2012.

We continue to have a healthy funnel of expansion opportunities with this customer mainly due to mobile data growth and adoption of new value-added services delivered by our service gateways. During the quarter, we received large orders from 14 service providers, three of which who are from new customers, nine of these orders were from mobile operators and two of these represented new customers [alone].

During the year we completed and achieved final acceptance of our USP one mobile project. We believe that our successful delivery proven installed base of two national U.S. mobile operators, puts us in a favorable position to in further business with Tier 1 U.S. mobile operators in the future.

While, we are pleased to see our strategy materialized by Allot winning business with Tier 1 service providers worldwide and large orders becoming increasingly larger part of our business. Timing of these large orders are how to predict and thus increase the risk of potential lumpiness in our business. We believe this was also one of the factors that affected the book-to-bill ratios during the quarter.

2012 was an important year followed in positioning the company for further growth, with the continued dramatic rise in video traffic we made two critical acquisition of video caching and video optimization solution. Moving forward, I expect that these solutions will be important part of our value-added service offering. During the second half of 2012, we saw roughly $4.3 million revenue contribution from video optimization and $3.2 million from video caching, in line with our estimate earlier this year.

During the fourth quarter, we want two mobile deals which included a combination of our service gateways for products in Control applications integrated with video caching solution. What I can have today is that both solutions are well integrated from both in operation and product point of view and have showing AC and growing pipeline.

It increasing number of our customers are realizing that by using service gateway is an intelligent platform that includes value-added services in areas such as video charging and security that are able to avoid installing multiple inline service and other ancillary equipment. We believed that these solutions are becoming real differentiator for us with service providers and substantially increased our total addressable market.

Looking into 2013, I believe the driving fundamentals of mobile data traffic space that helped us (inaudible) our business in 2012 have not changed. I see a healthy funnel of opportunities throughout the world with more activity and more RFPs in last year however we may continue to see lumpiness in our booking patterns as these large deals materialize.

In summary, we put up another quarter and year of sustained growth. We believe that our expanded product offering and roadmap coupled with diversifying our sales force into growing markets in APAC and Americas will help us mitigate macroeconomic effects in Europe and sustain our momentum.

I'll now hand the call over to Nachum for short financial review. Nachum, please go ahead.

Nachum Falek

Thanks, Rami, and welcome everyone. Let me take a few minutes to review the results we published earlier today.

I will be discussing non-GAAP numbers, which excludes the impact of share based compensation, early repayment of grants to the Israeli Office of the Chief Scientist revenues adjustment due to acquisition expenses related to M&A activity deferred tax assets and amortization of certain intangibles.

I will move fully explain the different one time issues which impact our results. Full reconciliation of the pro forma results discussed on this call to GAAP results is currently available for review on our website and in the press release issued today.

Now, let me walk you through the results for the quarter. Revenues for the fourth quarter on a non-GAAP basis increased to $28.5 million, up 29% over the fourth quarter of 2011 and 2% increase from the third quarter of 2012. The reason for the difference between GAAP and non-GAAP revenues is the revenues adjusted for impact of the fair value adjustment to acquire deferred revenues relating to the acquisition we did in 2012.

As a percentage of our revenues, sales in America accounted for 28%, EMEA 31%, and Asia-Pacific 41%. We had no 10% customer during the quarter.

Out of total revenues during the quarter, products were 74% and services 26%, just to clarify services include maintenance and professional services while product include platform such as service gateway and value-added services such as video. Gross margin for fourth quarter was 75.8% and most of the improvement versus last quarter was due to lack of royalty provision to the Israeli office of the chief scientist OCS. As many of you know, in the past we received grant from the OCS, which represented as a credit to our R&D line item which is why we presented the R&D expenses as a net amount.

This grant program is subject to payment of annual royalties of 3.5% of revenues, and the accrual presented as part of COGS. The grant also accrue interest. During the fourth quarter we recorded a liability for early payment of $15.9 million due to settlement with the OCS, representing the full balance of the contingent liability related to the grant received, which will be paid during the first half of 2013.

Upon making these payment the company will eliminate all future royalty obligation related to its anticipated revenues and save associated future interest payment relating to such obligations. Going forward we will not accrue 3.5% of royalties payment but on the other hand we will not receive the R&D grants we received in previous years.

As part of the new arrangement, we will apply and might get smaller grants which are not subject to repayment obligation. Our operating expenses increased to $17.4 million from $15.5 million in the third quarter and in line with our expectation. Our total headcount is now 442 employees.

For the quarter, we reported earnings per share of $0.14 down slightly from the third quarter but including the full impact of additional operating expenses from overseas. During the quarter we recorded net deferred tax asset in the amount of $900,000 the deferred tax is part of tax benefit line item on the P&L and we reconcile this income on the non-GAAP adjustment.

On the balance sheet side cash balances declined slightly to $143 million from $144 million, mainly due to net working capital needs of the acquired companies. Our DSO declined to 65 days from the DSO level of 75 days we had in the third quarter. Deferred revenues went down by $3 million, mainly due to recognized projects of orders from (inaudible) which equaled to see on the GAAP to non-GAAP revenue adjustment.

That conclude my remarks and we will now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will now take our first question from Daniel Meron of RBC Capital Markets, please go ahead.

Daniel Meron - RBC Capital Markets

Thank you, hi Rami and Nachum. Can you provide little bit more color on regional basis on the dynamics that you're seeing I think Rami you mentioned that you're little bit slower in the quarter in last six months actually when you look at it, but then you did have a pretty spike in Asia Pacific. So if you can just talk a little but more and details about regional demand—on what you see from various service providers in general in your discussions.

Rami Hadar

Okay, yes. Thank you, Daniel. So an absolute truth what I said is that Europe was more or less same -- flat in absolute numbers and given at the top line revenue growth became smaller in percent as of revenues. What we have seen in Europe, mainly in Western Europe, as I mentioned in prior quarterly calls, projects are not being cancelled. The need is there, but we are seeing across the board people being more diligent about budget spending, taking more time, negotiating, pricing, and thus deals closing slowly.

In Americas, South America is very healthy and growing, North America has grown nicely mainly due to the contribution of our two recent mobile wins.

In APAC, it's across the board. The APAC has been growing in the past years nice and steady and did so last year again a couple of nice large deals both in fixed and mobile health, APAC grows well as I said it an absolute term in revenue term these two regions of Americas and APAC grew about 90% year-over-year.

Daniel Meron - RBC Capital Markets

And was there any particular deals that helped up from in Asia-Pacific at least, when I do the math, sounds like it was a pretty big spike sequentially, how do you think that these trends will play out and when it comes to the follow-on orders from the recent deals that you had in the America is there anything that necessary signals or provides a milestone for follow-on orders as you look into the next few quarters or maybe what could be the demand drivers as you -- what comes up in your discussion with the carriers?

Rami Hadar

In APAC fundamentals have been changed the need is there APAC is not a very homogeneous market it's spread amongst many other many, many countries totally in Southeast Asia, except of course say China the growth rate is related to ability to penetrate new mobile operators, while growing installed base continues to expand we've talked about migrating an installed based from 3G to 4G and LP deployments and that's totally continued in the past two quarters as well.

In Americas, the South America continues to [have] interest across the board. We see healthy demand for our new caching solution. And in North America, as I said it really is about being able to leverage on our initial success and be able to continue getting expansion orders from our first initial to wins and hopefully penetrate other new accounts as well.

Daniel Meron - RBC Capital Markets

Okay, I got few more questions but I will join back later on. Thank you, Rami, good luck.

Rami Hadar

Thank you, Daniel.

Operator

We will now take our next question from Alex Henderson of Needham. Please go ahead.

Alex Henderson - Needham

Thanks. If I could just press the technical issue around the R&D and the royalty piece. So it sounds like you have a benefit to cost of goods sold associated with eliminating the royalty and you're also saying, you're losing in R&D credit, can you size those pieces versus the R&D credits similar in size or is that a net positive to the numbers and if so, what's the magnitude on a percent of revenue or some other metric?

Rami Hadar

Okay, hi Alex. So I would say that if I'm looking at the last couple of years, we on an average got a grant from the OCS between $2 million to $3 million per year, which was an offset to our R&D expenses. On the other hand, part of the COGS included 3.5% out of revenues and accrual for royalties. Taking into account those two effect on our P&L, it's already passed or it's already included on our non-GAAPn P&L for the fourth quarter, meaning on the fourth quarter we didn't accrue 3.5% royalties to deals yet and we didn't got any new grants, funding as well.

Alex Henderson - Needham & Co.

Okay, great. Thanks. Going back to the question just asked about demand conditions, you talked about need, but can you talk a little bit more about what you are actually seeing in your funnel of activity and deals that you are chasing? The obvious question here is given the softness that experienced in the December quarter, did it hollow out your funnel of activity or do you still have a very robust amount of activity going into the upcoming year that you can translate into business over the next 3, 6, 9 months? How do we think about the degree to which the softness was just timing of closure versus the amount of activity that's in the book which you're chasing?

Rami Hadar

Yes, thank you, Alex. So trying to quantifying funnel is a very subjective and [out-filling] exercise. Nevertheless, if I look at the funnel of activities, RFPs, POCs, demonstrations and what not now versus a year ago, it's definitely higher. How to quantify exactly by how much, but there is a lot of activities worldwide in all of our regions, including Europe. And obviously one can guarantee, but can expect that the reasonable part of these RFPs and trials will translate into revenue. So certainly the amount of activities, the interest we're seeing out there is healthy and greater than what it was this time last year.

Having said that, in one of our region and fortunately our largest region Europe, we are seeing deals take more time to close and we are seeing customers spend more time negotiating these deals. This is really the fundamental change versus two quarters ago.

Alex Henderson - Needham & Co.

Okay, thank you.

Operator

We'll will now take our next question from Tal Liani of Bank of America. Please go ahead.

Tal Liani - Bank of America

Hey, guys can you hear me?

Rami Hadar

Yes.

Tal Liani - Bank of America

Hello? Good. I have 2 questions please, both of them are North America. So North America was down substantially, sequentially and I'm trying to understand if you can discuss the sub region within, sorry Americas were down, is with U.S specifically is this the source of weakness in the Americas region?

Second question is related to that. U.S. going through lots of changes with M&As and investments in certain carriers, so what is the, what's the situation right now with U.S. wireless carriers, I know you don't discuss, the customers by name, but can you at least generalize and tell us how is the demand and what are the -- what's the progress you've seen over the last year?

Rami Hadar

Okay. So, to answer your first question and Nachum can come in, as I said it on a full year basis Americas, South and North, coupled together have grown very nicely and absolute in terms. You're right that from quarter-to-quarter North America declined mainly because of the recognition of large North American mobile carrier happen mostly in or all in Q3 of this year and was not contributing to revenues number in Q4, that's the technical decline from Q3 to Q4.

Regarding progress in North America, the fundamental need for products in North America is no different than any other place in the world. Mobile data is growing very rapidly, introductions of new bandwidth-hungry devices is fueling the growth of mobile data and thus the need for optimization and monetization solutions. The only difference in North America is the famous topic of net neutrality, we've spoken a lot about that.

From regulatory point of view there hasn't been any major progress positive or negative, network policy the [choice] is still out and where this is going, what we have done in a meantime is introduced more functions and more value-added service that can reside the [service-based] gateway and these functions don't read our network policy and does so to win well with functions which are not (inaudible) and position our net neutrality wins. This will be our strategy, our forward going strategy in North America until you we see the net neutrality issue up and out.

Tal Liani - Bank of America

Okay. Was there any impact of the M&A activity in North America. I was – I'm trying to understand whether the – first of all I'm trying to understand whether the miss, you missed the number, as we missed our expectations. Whether you missed our expectations because of North America or that was precisely in line with your expectations and the miss was the decline in Europe. And then if it was in North America, did it have a temporary impact meaning because of some M&A activity things got pushed out or more of about, it's about longer cycle to take decision?

Rami Hadar

Without, in terms of the major underlying reason I think I was, I'm clear on the core [lane], the weakness we're seeing across the region is mainly in Europe. In North America without being too specific I would say in a general term obviously when you have a customer and that customer goes through an M&A activity than that specific customer is you are typically not inclined to make a new acquisition, a buying decision and the short term, so that might potentially have an effect. Our growth in North Americas will be really dependent if we can leverage on our first two initial wins and continue to win large projects in this region.

Tal Liani - Bank of America

Okay, so last question from me. Within Europe, did you – and I apologize, I joined the call a little bit late. I apologize if you discussed it. You have a very big customer in Europe that you disclose every year. Did the decline happen because this – decline happened because new customers that were suppose to kick in, didn't kick in?

Rami Hadar

So Tal, on the call I did say that we had one 10% customer for the year, that's a very large mobile operator in Europe. And that customer on absolute terms – on absolute revenue terms grew by 27% in 2012. So they were not the point of weakness. Looking into 2013, we do believe that through needs of expansions and introduction of new value added services, we believe that customer will stay significant for us in 2013. So again, we don't think that was the point of weakness in the European region.

Tal Liani - Bank of America

Thank you.

Rami Hadar

Thank you, Tal.

Operator

We will now take our next question from Joseph Wolf of Barclays. Please go ahead.

Joseph Wolf - Barclays

Thanks. Question on the size of deals, you talked about large deals making the planning process or the signing process longer. Could you also frame may be the size of these large deals in the context, when you say large deals now and you have more large customers, how big are those deals that we should be thinking about?

Rami Hadar

In our terminology when we say our 14 large deals in our cavalry is any deal over $0.25 million.

5

Joseph Wolf - Barclays

That hasn't changed with the view dynamic of your customer base?

Rami Hadar

No we have been increasing the threshold of large deals and the card sales threshold was 200K now it's up to $0.25 million. Now these are bundled out of different size deals. I mean, there were deals that are couple of millions of dollars and there is deals which are you know $0.25 million and above. Obviously when I mentioned our strategy to moving to larger deals and their contribution to our booking growth, we are talking about expecting that in every quarter, we do land $1 million or $2 million or $3 million, even multiple million dollar deals, but in terms of counting, the 40 large deals, anything above $0.25 million.

Joseph Wolf - Barclays

Okay, and then just you know you talked about the strategy and the way you see your customers with your integrated approach, I guess on the box count by putting multiple services in the service gateway. Could you address that and perhaps in the context of the Oracle Acme Packet acquisition that was announced yesterday?

Rami Hadar

Well, it's very hard to create a direct correlation because they are not really sure what's Oracle's intentions. It seems that they are looking for a growth base within our networking totally in areas with Layer-7 functionality. We have encountered some activity with Oracle while – when we integrated our service gateway with their PCRSA function, [policy will] function, which is a complementary product to ours. So we could see that this might be the beginning of Oracle's interest in certain areas of data networking may be mobile totally as things become more software oriented which is in a way our direction was value added services. We can incorporate these functions either internally into our service gateway or externally virtualized and running on blade servers anywhere in the network right next to us in the core or in the cloud. The fact that we have a very strong Layer-7 series function within the service gateways allows us to direct various types of traffic or users to these value added services. So all in all it seems that virtualization, more software components and growing segment within mobile data networking seems to be kind of the common theme in the same activity.

Joseph Wolf - Barclays

Okay great. Thank you.

Rami Hadar

Thank you.

Operator

We will now take our next question from Matt Robison of Wunderlich. Please go ahead.

Matt Robison - Wunderlich Securities

Hi guys. First just to check my arithmetic, your commentary on optimization in cashing implies the core business was $23 million in the fourth quarter is that right?

Nachum Falek

Roughly as small it is.

Matt Robison - Wunderlich Securities

Now you've had pretty significant sequential recovery from Europe in the first quarter in recent years and I think some of your commentary implied that your big customer in that area is staying with you and has got, has more to do with value added features. Should we be anticipating on meaningful sequential increase in your first quarter?

Rami Hadar

Matt, I hesitate to give specific guidance on the region totally in times of this kind of a macro-economy. But you did pick up the fact that our core customers, the very two large mobile operators we have in Europe have stayed with us and actually both came back, at different levels, but both came back with expansion orders. But that's good enough to more or less achieve in absolute terms flat results. The point is if we want to continue growing at the rates that we have been doing the past couple of years, Europe just getting expansions from existing customers is nice but not good enough, we need to be able to win new accounts as well and that's what was lacking in the last quarter.

Matt Robison - Wunderlich Securities

Just give us a kind of a qualitative feel, where should we why should we expect the regional, what should be the better performance regional in the first half of this year?

Rami Hadar

Matt, it's very hard to predict. Again $2 million or $3 million or $4 million could swing in different ways, but I do expect EMEA to remain our largest region and potentially depending on couple of deals which are in the pipeline could swing back into our growth and therefore stay and may hopefully resume a growth in the first part of 2013, thank you.

Matt Robison - Wunderlich Securities

Thank you.

Rami Hadar

Thank you, Matt.

Operator

We will now take our next question from Catharine Trebnick of Northland Securities. Please go ahead.

Catharine Trebnick - Northland Securities

Good morning Rami and Nachum, quick question. What motivated you to do this with the OCS and is there any other motivation behind this besides better growth margins etcetera, because doesn't this eliminate the approval for the Israeli Government to actually approve a merger and acquisition or a takeout. Thank you.

Nachum Falek

Hi Catherine, so first no, what will be the settlement with [Deutsche] doesn't meant anything regarding tax benefit or approved [under] price or something like that, which is completely different taxation in Israel. As for the first question, I think that first of all as we mentioned we are saving the interest that is accrued. Getting to your P&L question, if I am trying to estimate impact on 2013 P&L think of something which is 3.5% to even 5%. In some cases royalty is out of for revenues, so let's say at $100 million level it's at least $3.5 million to $5 million of an expense that should go straight to the COGS. While we are waving on the one end the grant of between $2 million to $3 million that's what we've experience in the last couple of years. So the net effect on this year's P&L, the estimated is a positive effect on the P&L.

Catharine Trebnick - Northland Securities

Okay, and then the other question. Rami, are you seeing any of the carriers looking at Wi-Fi. Do you think that's complementary to DPI and, or do you think it's a little bit causing some of the problems with the slowness in Europe? Thanks.

Rami Hadar

Definitely many carriers are looking at the Wi-Fi as a complementary strategy to their wireless coverage totally in hot zones of congestion. All in all its neutral. There is different flavors to Wi-Fi whether it's Wi-Fi in Starbucks where the carrier is not even involved and aware of this data stations or its Wi-Fi deployed by a large mobile operator for example Orange in France. We have numerous examples where our service gateway are scalable enough to take on data traffic coming both from 3G and from 4G and from Wi-Fi networks and do both a policy and charging from traffic coming from all three axis technologies. So in some cases it calls for an expanded deployment so we can take on more traffic and some cases the carriers doesn't see the traffic and therefore we don't see it, so all-in-all its net neutral at this time.

Catharine Trebnick - Northland Securities

All right thank you very much, I'll past it on.

Rami Hadar

Thank you very much Catharine.

Operator

We will now take our next question from Jay Srivatsa of Chardan Capital Markets. Please go ahead.

Jay Srivatsa - Chardan Capital Markets

Thanks for taking my question. Rami, you mentioned that decisions are taking a little longer. I am trying to drill down here. Is this because the marketplace is a lot more competitive or are there more competitive bids out there for carriers to choose from and that's taking more time or its just macro conditions being weak meaning the capital expenditure is not as quick as it used to be?

Rami Hadar

My subjective analysis is that's its more economy and budget. Obviously, the fact that there is competition and allows the service providers to negotiate, but I don't see any major change in the competitive environment. I mean the pure plays are the pure plays, there was no new players on the floor. The alternative solutions, from – the integrated solutions form larger and system integrators is there and I believe continues to lose market share to the pure plays, both us and our competitors. So I don't see any shift in competition. Therefore, it seems to me more if you, obviously you are reading the news like I am. Some of Europe's largest operators are either doing layoffs or downsizing on CapEx and we've gotten to the point that its deep in all budget items and things which you are able to duck earlier this year is starting to creep up. So again I think it's more economy and less about if any about competition.

Jay Srivatsa - Chardan Capital Markets

All right, speaking of competition one of your competitors last month acquired a company and that gives them entry into the enterprise market through an OEM channel. I guess the question is what does that do to your strategy in terms of addressing that market and does that – is that of concern to you?

Rami Hadar

Its more, it's neutral to us. I mean a small part of our business does comes from large enterprise, but if you've been listening to our calls our strategy is more and more deeper into large service providers. So this entry to enterprise channels is fairly neutral to us.

Jay Srivatsa - Chardan Capital Markets

Okay, last question, you talked about how this year you're going be needing to look at adding more customers instead of just expanding at current customers. What are some of the strategies you're taking? I guess the real question is what are the challenges in terms of customer acquisition and how do you hope to address that?

Rami Hadar

Right, so first to quantify the challenge, as I mentioned in the past typical quarters, we get about 70% of our revenues from expansion deals and 30% comes from new deals. Obviously expansions are more predictable and more manageable. Where expansions are totally – is where new deals totally with large service providers always have a timing issue. In order to continue growing at the pace we've been growing in the past couple of years we need to execute well on both fronts keep our customers happy, keep getting these expansion orders on one hand and be able to continue winning medium and large size service providers worldwide, that's totally one strategy we are doing. Part of our strive to add more and more value added services to the service gateway is one to create differentiation, but second to have more things to up sales to our existing customers which is a strategy that has worked out for us very nicely. We've all been tracking our very large mobile customer in Europe and part of our ability to keep that customer engaged is because we keep on bringing more and more functions and value added services to our offering and creating up sale opportunities. That's from product customer point of view, and from geography point of view as I said on my talk, the strategy is really follow the money. In fact growth areas are now in Americas and APAC well that's where we're going to beef up our sales and technical assets.

Jay Srivatsa - Chardan Capital Markets

Okay. Thank you.

Rami Hadar

Thank you very much.

Operator

We will now take our next question from Brent Bracelin of Pacific Crest. Please go ahead.

Brent Bracelin -Pacific Crest

Thank you for taking my question. Wanted to go back to Europe if I could, Rami, you had probably talked about kind of lengthening deal cycles about six months ago in Europe. On an absolute basis it looks here it's the lowest kind of quarterly level in a couple of years, lowest percentage of revenue in quite some time. As we think about, I know you're having trouble wanting to kind of predict given the macro here, but as we think about kind of Europe trending this year would you be disappointed if Europe was flat again and as we think about kind of the pipeline in Europe do you have visibility with some new customers that suggest you could actually grow your European business this year or is it again too early to tell?

Rami Hadar

I think it's almost yes to all of your answers. Will I be disappointed if Europe stays flat? Yes. Do I see a funnel that will allow Europe to resume growth? That's yes as well. And the whole, the bottom line will be obviously our execution and products being able to show financial justifications for customers who want to expand and buy into our new products in Europe.

Brent Bracelin - Pacific Crest Securities

Okay, helpful. And then, just as a follow-up relative to the lengthening sales cycle, kind of commentary, is that isolated to Europe today or using any sort of signs, the macros also starting to lengthen deal cycles in Americas or Asia Pac?

Rami Hadar

Right now, it's mainly Europe, hope it stays this way. Also a comment both on new question now and before. I have mainly analyzed on my talk the whole year. And I did that on purpose, say given our size and given the fact that we all dependent on total amount of larger a deal. Sometimes analyzing just one quarter and creating a trend out of it could be very misleading. Numbers can fluctuate just because we recognize a total large project here and there. That's why I think analyzing a year and taking the conclusions there is the most stable and predictable exercise. And as you've seen in my analysis what we've seen is flat in EMEA and very nice growth in APAC and in Americas. We need to be able to continue that growth in these two regions and get you payback to growth.

Brent Bracelin - Pacific Crest Securities

Very helpful. Also, I wanted to follow up on kind of the seasonality questions here, while I appreciate kind of the annual comments at the model on the quarterly basis. So as we think about kind of typical large seasonality, should we look at Q4 revenue takeout kind of the deferred revenue kind of adjustment of $2 million and look at kind of current run rate of about $26 million a quarter? And if we take that current run rate of $26 million a quarter, what should we be thinking about relative to seasonality in the March timeframe? Historically, service provider CapEx spending is slow in March, should we assume a potential sequential decline in line with more normal seasonal trends in kind of the March quarter or how should we kind of think about you know looking at modeling revenue for kind of the March timeframe? Any color there would be helpful?

Rami Hadar

Yeah. So obviously, the exercise is too complicated and I can't go into quantitative measures. What I would say is that as we again focus more on larger and larger service provider deals, these tend to be a lift, not absolute but less seasonal. There is a small element of our business which is seasonal where Q4 and Q2 quarters are stronger than Q1 and Q3, but that part of deal is mainly with the small service providers, ongoing incrementally on small size deals, sometimes channel dependent and tend to be seasonal. So there is some seasonality on our numbers but not on the very large deal.

Brent Bracelin - Pacific Crest Securities

Okay, great. My last question is really on competition. Obviously, Sandvine for the first time is going to show a bit of a return to growth for the first time again and little over two years. Are you seeing them show up in more new deals or have you seen a change in the win rate at all or do you kind of see it kind of business as usual, three main competitors in the space show up and there is really no change? Just trying to help understand kind of why we're seeing a return to growth there and if you've seen any sort of change to the competitive environment?

Rami Hadar

Yeah. I have to say with our limited view, I already said with respect to Sandvine as a competitor, I think they were over-punished in the past. I mean call it to see them going back to growth and see our whole space get back to growth. So no fundamental change in the various strengths and weakness of these three core players. My strong belief that actually only three players in the pure-play is fairly favorable competitive environment and is long and the growth area is really for us three to continue taking market share from the integrated players versus from one another.

Brent Bracelin - Pacific Crest Securities

Okay, helpful. Thank you.

Rami Hadar

Thank you.

Operator

We will now take our next question from Dov Rozenberg of Clal. Please go ahead.

Dov Rozenberg - Clal Finance Betucha Brokerage

Hi, thank you. First of all just I missed products and services, can you just tell me what the breakdown was?

Rami Hadar

Sure, Dov. 74% were products and 26% were services.

Dov Rozenberg - Clal Finance Betucha Brokerage

Okay, great. Thanks. Now we talked a lot about the funnel etcetera. I was wondering as far as the acquisitions pipeline, in other words looking into 2013, is that also what you expected the opportunities within video caching and optimization looking forward?

Rami Hadar

Yes, they came in more or less as we expected in terms of revenue contribution and controlling, backlogging to revenues. Looking into 2013, they both have a pretty good pipeline, probably caching better than video optimization given that caching is a little bit more of a maturing market which has its upside and downsides as well. Both the funnels, caching greater than optimization.

Dov Rozenberg - Clal Finance Betucha Brokerage

Okay. And then, do you expect the enterprise deal, we mentioned it before, do you think it will be 20% also going forward, also 2013 and beyond?

Rami Hadar

Yeah, that's a more or less rough estimate and sometimes the line is even blur, I mean if you are selling a device say to a large service provider's data center because of the cloud strategy, is that a enterprise deal or service provider deal. But more or less, that's the area, it's been stable for couple of years, but again the focus and the growth and roadmap is into service provider.

Dov Rozenberg - Clal Finance Betucha Brokerage

Okay, great. Thanks. One last question for me. Just we talked a lot about Europe, and I just wanted to make sure looking into 2013 and not specifically numbers, but do you expect all the regions to grow let's say in the first half of next year or in 2013?

Rami Hadar

Not giving any guidance, obviously if we want to continue to grow, we need to see these two regions and hopefully Europe resume growth. The challenge would be definitely Europe.

Dov Rozenberg

All right. Okay. Thank you very much.

Rami Hadar

Thank you.

Operator

We will now take our next question from Sanjit Singh of Wedbush Securities. Please go ahead

Sanjit Singh - Wedbush Morgan Securities

Thank you for taking my questions. I was wondering if you could give us an update on product roadmap, is there any install base upgrade potential with any new products that are coming up this year? That's my first question.

Rami Hadar

We will be announcing several interesting roadmap announcements in the coming Mobile World Congress in Barcelona. So I suggest I don't want to take any thunder from our Product Management Group, but we have couple of very exciting functions and value-added services that we are planning to release, some of them are actually even getting head start in terms of winning deals. And we will announce them in the months from now in Barcelona.

Sanjit Singh - Wedbush Morgan Securities

Great. And then on value-added services, what was the percentage of revenue this quarter, I think you mentioned it last quarter? Do you have a value-added services contribution this quarter?

Rami Hadar

Yeah, I'm sorry, I don't have that figure right now. We did break out the video products say for the past 6 months, because obviously they are point of interest. Starting next quarter we'll get back to -- we would put video delivery as part of value-added services and we'll break it out on percentage. At this point, I apologize I don't have the numbers.

Sanjit Singh - Wedbush Morgan Securities

No worries. And then your thoughts on M&A, I was still looking at potential deals add into the value-added services portfolio or are you looking to take a pause on the M&A front?

Rami Hadar

So we've been in pause mode if you may in the past say couple of months. They are just seeing the [tour] positions we just discussed. I believe we are now at the point of almost done with the same phase. And hopefully we'll have the bandwidth and attention pursue other interesting complementary functions to our offerings totally around more and deeper value-added services. Whether they happen in the shorter or more longer term or even -- or in 2013, I cannot say but we will be back in a hunting mode by the end of Q1.

Sanjit Singh - Wedbush Morgan Securities

And Nachum, my final question, if you could update us on the [outcomes] for the Oversi and Ortiva if you could? Is that a Q1 timeframe or?

Nachum Falek

Do you mean in terms of EPS improvement?

Sanjit Singh - Wedbush Morgan Securities

Yes, that's exactly, right.

Nachum Falek

Oversi, no, I mean, as Rami mentioned, both acquisitions is according to our estimate on the top line and just to remind you both of them we said that they are breaking even by the end of the year. So actually if you're looking at Oversi on a standard-alone basis which obviously is a little bit complicated. Looking into it was kind of breaking even and even profitable during the quarter.

Sanjit Singh - Wedbush Morgan Securities

Thank you so much.

Nachum Falek

Thank you.

Operator

As there are no further questions, I would like to turn the conference back over to your host for today for any closing or additional remarks.

Jay Kalish

Thank you very much for joining us all today. And we look forward to meeting with you during the quarter and welcoming you back of course to the next quarter's conference call.

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