Allot Communications: Order Rate Accelerates

| About: Allot Communications (ALLT)

Allot Communications (NASDAQ:ALLT) reported excellent on target Q3 results. Sales advanced 37% to $20.1 million. Fully taxed earnings rose 120% to $.11 a share. Backlog declined for the first time in three years. That stemmed from a delay in signing a $9.5 million deal with an Asian land line provider. Allot completed that transaction in October. The book-to-bill ratio promises to rebound dramatically in Q4 as a result. Profit margins continued to widen. Allot has been able to maintain per-unit selling prices by including more software features to offset hardware cost declines. The switch to software from hardware has bolstered gross margins. Allot has been spending a portion of that extra discretionary income on R&D and marketing. The remainder has flowed to the bottom line. Earnings are likely to keep increasing faster than sales as that trend continues.

Allot is gaining market share. The company faces two primary competitors. Those companies have established customer bases which Allot is unlikely to penetrate. But Allot is winning a growing percentage of new business opportunities. The "deep packet inspection" industry remains in an early stage of development. Even in Europe, where the technology is farthest along, substantial growth potential exists as mobile networks expand to accommodate booming demand. Video traffic in particular is driving the need for bandwidth optimization systems. In Asia and North America both land line and mobile networks have only begun to install the technology. The Far East is moving faster at this point due to regulatory uncertainty in the United States. But American carriers are beginning to contemplate purchase of Allot's systems for bandwidth management reasons alone. If the F.C.C. eventually allows them to implement variable pricing schemes, the way it's done in Europe, demand could enjoy a further jolt.

Orders are gaining momentum. We have raised our full year estimates accordingly. Sales could reach $77 million (+35%) to provide fully taxed earnings of $.40 a share (+167%). Sales could climb another 23% in 2012 to $95 million even if the worldwide economy experiences a material slowdown. Income could attain $.55 a share (+37%). Stronger gains are possible. Above average growth could be sustained well into the decade. Allot is located in Israel.

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Disclosure: I am long ALLT.