A Quick Take on Allot
Introduction
Allot (ALLT) is an Israeli provider of network intelligence and security solutions, primarily targeting carriers and enterprises globally. It has two main lines of business, Allot Smart (network optimization) and Allot Secure (network security), which it is in the process of merging.
Reasons to buy
While Allot Smart has been declining, it is running into some good fortune in the form of the bankruptcy of its main rival Sandvine, from which it stands to gain much of its $200M/y business, on top of other growth opportunities like the build-out of 5G and FWA (Fixed-Wired Access, that is, mobile broadband).
Allot Secure is growing very fast and has hardly begun to scratch the surface of its huge TAM ($5B+).
Allot Secure is offered on a SECaaS (Security as a Service) recurring revenue basis, producing high-margin subscription revenues. As a network native application installed in the core of the telecom network, it doesn’t need installation at the end customer, making it a frictionless option.
The company is merging its Smart and Security businesses, producing some cross-selling opportunities.
Winning some of Sandvine customers for its Smart business could also produce additional tailwinds for its Security business.
The company has reached breakeven and is generating positive cash flow.
The company has a new CEO and new CFO who have extensive contacts in the carrier world that could open doors.
Even after an extended run, the shares are still not expensive.
There are risks related to execution, geopolitical instability (it’s an Israeli company), regulation (witness what happened to Sandvine), as well as the possibility of worsening economic circumstances.
Products
Allot provides network intelligence and security solutions for mobile, fixed, and cloud service providers, as well as enterprises. The company's products are divided into two main categories: security solutions, which are offered on a Security as a Service (SECaaS) recurring basis and the legacy AllotSmart, its network visibility and traffic management solutions, which are offered on a CapEx basis.
Network Visibility and Traffic Management Solutions (AllotSmart):
Smart5G: Delivers visibility and control of 5G network and application performance.
SmartVisibility: Provides access to usage data and analytics for improving network performance.
SmartTraffic QoE: Leverages SmartVisibility to automate congestion management and optimize Quality of Experience (QoE).
SmartPCC: Enables personalized service plans for prepaid, postpaid, and business customers.
SmartSentinel: Assists with complying with regulations such as URL filtering, data retention, and GDPR.
Smart NetProtect: Offers multi-layer protection from attacks against network infrastructure, subscribers, and applications.
Allot NetXplorer: A management umbrella for Allot's devices, platforms, and solutions, providing a central access point for network-wide monitoring, reporting, analytics, troubleshooting, accounting, and QoS policy provisioning.
Allot Secure (SECaaS Security Solutions)
Allot Secure 360: A comprehensive security solution to protect network customers, network service integrity, and brand reputation. It includes various components to provide end-to-end protection against cyber threats.
Allot Secure Management (ASM): A platform that creates a unified security experience by integrating different enforcement points such as NetworkSecure, HomeSecure, DNSecure, IoTSecure, EndpointSecure, and BusinessSecure. It provides threat detection, machine learning, and personalization capabilities.
Allot NetworkSecure: A multi-tenant solution that allows service providers to offer opt-in security services to subscribers to enforce safe-browsing limits and prevent malware infections at the network level.
Allot HomeSecure: A multi-tenant solution that allows service providers to offer opt-in security services to subscribers to define and enforce safe-browsing limits (Parental Control) and to prevent incoming malware from infecting their devices, enforced at the home router & network level.
Allot DNSecure: A multi-tenant solution that allows service providers to offer opt-in security services to subscribers to enforce safe browsing limits and prevent malware infections at the network DNS requests level.
Allot IoTSecure: A multi-tenant solution that allows CSPs to provide each enterprise customer with a dedicated management console to monitor and secure their mobile IoT deployments.
Allot BusinessSecure: A multi-tenant solution that provides a secure network for businesses through a firmware agent installed on the business router, supported by the Allot Secure cloud, and a mobile application.
EndPoint Secure: A multi-tenant solution that secures subscribers' devices while off the internet, offering malware protection and controls.
Allot Secure Cloud: Provides up-to-date threat intelligence, web categorization, and device fingerprint data to all enforcement points in the security architecture, using machine learning and AI to identify devices and provide anti-virus screening.
Allot DDoS Secure: Provides attack detection and mitigation services that protect networks against DoS and DDoS attacks, zero-day attacks, worms, and spambot behavior.
Allot's solutions are designed to help service providers and enterprises detect security breaches, protect networks and users from attacks, understand network behavior, optimize network performance, and reduce costs. Allot's products use deep packet inspection (DPI) or deep network inspection (DNI) technology, which allows for the inspection of traffic sent over a network.
Allot's security solutions are offered to service providers on a revenue-sharing basis or for a fixed yearly fee, which the company refers to as Security-as-a-Service (SECaaS). The company's SECaaS solutions enable operators to provide network-based security services to their customers. The company has a goal to position itself as a security-first company with a focus on a unified business unit that combines its network intelligence and security offerings.
Business model
Transitioning to a SECaaS model for its security products. This shift was driven by the success of Vodafone, which generated significant recurring revenue from its customers with Allot's security solutions. While Vodafone was on a fixed contract with Allot, this success led Allot to introduce a revenue-sharing subscription model for its security business with other customers (and even with Vodafone as well). AllotSmart (its intelligence product) still works on a license basis.
Differentiation of SECaaS: The SECaaS offering is "network native", meaning it is integrated directly into the telecom network, providing frictionless security to end-users. This eliminates the need for end user installation and is a key differentiator for the company.
Customers include mobile and fixed broadband service providers, cable operators, satellite service providers, private networks, data centers, governments, and enterprises such as financial and educational institutions. They also target large telecom carriers such as Verizon and Vodafone.
Focus on Strategic Accounts: Allot has shifted its SECaaS sales strategy to focus on strategic accounts with high revenue potential, ensuring smaller deals have customer assurances or minimum revenue thresholds.
Allot employs a mix of direct sales and channel partners, including distributors, resellers, OEMs, and system integrators, to reach its customers. The sales cycle varies depending on the customer, from one to six months for enterprises up to twelve to twenty-four months for large service providers.
Growth drivers
Allot's growth drivers can be categorized into several key areas, primarily within its Security-as-a-Service (SECaaS) business and, to some extent, within its revitalized Deep Network Inspection (DNI) business.
SECaaS Growth Drivers:
Allot's strategic shift to a security-first company with a focus on SECaaS is a major driver, moving from a traditional license-based model to a recurring revenue model, which provides more stable and predictable income streams.
Allot has established strong partnerships with major telecom carriers like Vodafone and Verizon, which are driving SECaaS adoption. These partnerships provide significant expansion opportunities, with Verizon alone having a potential ARR opportunity of over $1B.
Growth in SECaaS revenues is driven by an increasing number of subscribers using Allot's security solutions through its telecom partners. For example, Vodafone has expanded its cybersecurity services to protect its fixed broadband customers using Allot's SECaaS solution.
The introduction of new security services and expansions with existing customers are also key drivers. For example, MEO in Portugal has introduced a new cybersecurity service for their fixed broadband customers based on Allot's solution. Additionally, Vodafone has launched Securenet Home in the UK, which contributed to strong SECaaS metrics in Q3 2024.
Allot is seeing growth from increased usage and higher penetration of their services within the accounts they already work with.
Allot's SECaaS market is still relatively untapped, with the company estimating they have penetrated less than 1% of their total addressable market (TAM) of over $5B, indicating significant room for growth.
Revitalized DNI Business Growth Drivers:
The bankruptcy of Sandvine, Allot's main competitor in the DNI market, is a major opportunity. Allot is positioned to capture a significant share of Sandvine's $200M annual revenue base and consolidate the DPI/DNI landscape, potentially making Allot the primary option for customers seeking a best-of-breed vendor.
The increasing adoption of 5G networks and the broadening deployment of Fixed Wireless Access (FWA) are expected to reignite growth in Allot's DNI segment.
Additional Growth Factors:
Turnaround initiatives and improved financial performance, including positive free cash flow and non-GAAP profitability, have made Allot more attractive. The company has reduced expenses and is reorganizing to be more customer-centric and efficient.
The strategic integration of Allot's DNI and cybersecurity business units is expected to create synergies, enhance customer offerings, and drive innovation.
New leadership with a focus on recurring revenue, diversification of revenue streams, and a go-to-market strategy that combines DNI and cybersecurity.
Exploring the potential of moving their products in the cloud.
As service providers enhance their networks to support 5G, the need for sophisticated network management and security solutions increases, positioning Allot to capitalize on this trend
Continued investment in R&D to enhance the unique security offerings and drive growth.
The company is also uniquely positioned to capitalize on the growing demand for cybersecurity solutions and network intelligence, leading to significant revenue and profit growth opportunities.
Combining Allot Smart and Security
Management is combining the business units and producing a differentiated and fully integrated solution for customers creating a unique value proposition, as only a few companies are positioned to offer such an integrated approach. It also creates better cross-selling opportunities.
Finances
With the SECaaS growth at 50%+ becoming a bigger part of revenue (20% in Q3), growth is returning to the company as it makes up for the decline in its legacy smart business.
Gross margins are very attractive and GAAP operating margins are almost back to breakeven:
While overall revenues are still stagnant, the company has made great strides in reducing OpEx:
As a result, cash flow has been improving greatly:. Not yet positive on a TTM basis but operating cash flow was positive (+$1.9M) in Q3 with the company even registering a non-GAAP profit of $1.3M.
The company has $54.3M in cash and equivalents and $39.9M in convertible debt (at zero interest).
Valuation
In addition to the 39.29 shares, there are 3.95M options and RSU outstanding (per March 2024, the latest for which data is available), producing a fully diluted share count of 43.24M shares.
At $6.5 per share, this produces a market cap of $345.9M and an EV of $331.6M. With analysts expecting FY25 revenues to be $99.8M this amounts to an EV/S at 3.3x. Analysts also expect an FY25 EPS of $0.06, so on an earnings basis the shares are still very expensive.
Conclusion
While Allot Smart has been declining, it is running into the good fortune in the form of the bankruptcy of its main rival Sandvine, from which it stands to gain much of its $200M/y business, on top of other growth opportunities like the build-out of 5G and FWA (Fixed-Wired Access, that is, mobile broadband).
Allot Secure is growing very fast and has hardly begun to scratch the surface of its huge TAM ($5B+).
Allot Secure is offered on a SECaaS (Security as a Service) recurring revenue basis, producing high-margin subscription revenues. As a network native application installed in the core of the telecom network, it doesn’t need installation at the end customer, making it a frictionless option.
The company is merging its Smart and Security businesses, producing some cross-selling opportunities
Winning some of Sandvine's customers for its Smart business could also produce additional tailwinds for its Security business.
The company has reached breakeven and is generating positive cash flow.
Even after an extended run, the shares are still not expensive.
There are risks related to execution, geopolitical instability (it’s an Israeli company), regulation (witness what happened to Sandvine), as well as the possibility of worsening economic circumstances.