ALLOT COMMUNICATIONS LTD ALLT
November 24, 2015 - 11:52am EST by
cobia72
2015 2016
Price: 5.37 EPS NA 0.28
Shares Out. (in M): 33 P/E NA 20.0
Market Cap (in $M): 186 P/FCF NA 7.6
Net Debt (in $M): -121 EBIT -4 9
TEV ($): 65 TEV/EBIT NA 7.6

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Description

Allot Communications (ALLT) – Back from the Dead

Allot Communications is a hardware and software provider of solutions that allow its customers visibility into their network traffic and control of that traffic based on customer-written rules.  This capability is known as Deep Packet Inspection (DPI) and Allot was one of the first players into this market.  Originally used by carriers to slow down or stop traffic going to or from specific websites, the technology is now used for general visibility, differentiating rate plans, and security functionality.

 

The original DPI vendors, Allot, Sandvine Corp (SVC.CN), and Procera Networks enjoyed high multiples in the 2011 – 2013 period when their revenues were growing quickly due to carriers efforts to control traffic on their networks.  At its peak, Allot was a $30 stock (compared to $5.37 today).  Since then, investors have soured on these companies as revenue growth has slowed, impacting margins as well.  Allot had 17.1% operating margins in 2012 compared with a slight loss for 2015E. 

The decrease in revenue growth was caused by increased penetration into the market and by the net neutrality issue in the United States.  Net neutrality means that the carriers cannot give preferential treatment to any sites’ traffic on their networks.  For example, Verizon cannot throttle the speed of a small website relative to the speed of Netflix on its network or vice versa.  DPI hardware had been used to enable this differentiation so the net neutrality uncertainty and finally, net neutrality laws, caused a stoppage of DPI sales in the US, which had been a large market previously.

So where does this leave Allot today?  The company is proceeding with two revenue driving initiatives that we feel will reignite revenue growth and margin expansion.  The first driver is the use of the company’s DPI hardware and software to enable security functionality.  Allot has been selling security functions such as parental control, anti-malware, anti-spam, and anti-DDoS (distributed denial of service attacks) over the past year, and this accounts for 30% of the company’s revenue today.  Vodafone is Allot’s flagship customer in this segment and it has rolled out these services to millions of its customers (https://securenet.vodafone.com).  In addition, the company is now targeting enterprises and cloud providers as customers in addition to their traditional service providers.  These new customers can benefit from Allot’s security portfolio as well as its visibility products used to enforce service level agreements (SLAs).    

Given the demand for security products and Allot’s entrance into the new cloud provider and enterprise markets, we feel that the company can grow at a 20% clip for the next few years.  Couple that with good expense control and the company could reach a 14% EBIT margin in 2017.  This would translate to a 3.1x EV / EBIT ratio today which is extremely cheap. 

In addition to abundant earnings power, Allot could also make a nice M&A target to a larger hardware player.  Cisco, Alcatel-Lucent, Huawei, and others could all benefit from Allot’s DPI expertise, as could security players such as Check Point or Fortinet.  

With 2/3 of the company’s market share in cash and with minimal losses today, Allot presents an extremely good risk / reward at these levels.  In addition, Allot has a decent amount of sell-side coverage but they are uniformly negative on the company so the only change in sentiment could be for the good.

        

 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Allot's Q4 revenue estimate represents a significant increase from Q3 and the market is waiting to see if they can hit it.  If they do, the stock will likley go higher.  Also, the company could be acquired by a larger security or networking player.

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    Description

    Allot Communications (ALLT) – Back from the Dead

    Allot Communications is a hardware and software provider of solutions that allow its customers visibility into their network traffic and control of that traffic based on customer-written rules.  This capability is known as Deep Packet Inspection (DPI) and Allot was one of the first players into this market.  Originally used by carriers to slow down or stop traffic going to or from specific websites, the technology is now used for general visibility, differentiating rate plans, and security functionality.

     

    The original DPI vendors, Allot, Sandvine Corp (SVC.CN), and Procera Networks enjoyed high multiples in the 2011 – 2013 period when their revenues were growing quickly due to carriers efforts to control traffic on their networks.  At its peak, Allot was a $30 stock (compared to $5.37 today).  Since then, investors have soured on these companies as revenue growth has slowed, impacting margins as well.  Allot had 17.1% operating margins in 2012 compared with a slight loss for 2015E. 

    The decrease in revenue growth was caused by increased penetration into the market and by the net neutrality issue in the United States.  Net neutrality means that the carriers cannot give preferential treatment to any sites’ traffic on their networks.  For example, Verizon cannot throttle the speed of a small website relative to the speed of Netflix on its network or vice versa.  DPI hardware had been used to enable this differentiation so the net neutrality uncertainty and finally, net neutrality laws, caused a stoppage of DPI sales in the US, which had been a large market previously.

    So where does this leave Allot today?  The company is proceeding with two revenue driving initiatives that we feel will reignite revenue growth and margin expansion.  The first driver is the use of the company’s DPI hardware and software to enable security functionality.  Allot has been selling security functions such as parental control, anti-malware, anti-spam, and anti-DDoS (distributed denial of service attacks) over the past year, and this accounts for 30% of the company’s revenue today.  Vodafone is Allot’s flagship customer in this segment and it has rolled out these services to millions of its customers (https://securenet.vodafone.com).  In addition, the company is now targeting enterprises and cloud providers as customers in addition to their traditional service providers.  These new customers can benefit from Allot’s security portfolio as well as its visibility products used to enforce service level agreements (SLAs).    

    Given the demand for security products and Allot’s entrance into the new cloud provider and enterprise markets, we feel that the company can grow at a 20% clip for the next few years.  Couple that with good expense control and the company could reach a 14% EBIT margin in 2017.  This would translate to a 3.1x EV / EBIT ratio today which is extremely cheap. 

    In addition to abundant earnings power, Allot could also make a nice M&A target to a larger hardware player.  Cisco, Alcatel-Lucent, Huawei, and others could all benefit from Allot’s DPI expertise, as could security players such as Check Point or Fortinet.  

    With 2/3 of the company’s market share in cash and with minimal losses today, Allot presents an extremely good risk / reward at these levels.  In addition, Allot has a decent amount of sell-side coverage but they are uniformly negative on the company so the only change in sentiment could be for the good.

            

     

     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Allot's Q4 revenue estimate represents a significant increase from Q3 and the market is waiting to see if they can hit it.  If they do, the stock will likley go higher.  Also, the company could be acquired by a larger security or networking player.

    Messages


    SubjectRevenue build?
    Entry11/24/2015 02:54 PM
    MemberMostly_Ugly

    Agree if they grow topline at 20% this is a buy.  Consensus is 12.5%, and management seems quite unspecific about their opportunities.  How do you build to your number?


    SubjectRe: Revenue build?
    Entry11/25/2015 10:38 AM
    Membercobia72

    Security is 35% of their business growing at 30%.  Monitization is another 20% growing at 20%.  They have a brand new market in using their DPI technology to drive internet advertising.  That is 0 this year and I forecast 5% next year.  Their core traffic optimization business should be flat next year.  That gets you to approximately 20% next year.  It could be a little less if they have success bringing new customers on with term licenses, but I would give up some growth for the stability and visibility that term licenses will bring.

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