Allot Ltd. - 'A Lot' To Like At These Depressed Levels

Summary

• You are currently paying 0.7x sales for Allot's profitable DPI business and getting its security business for free.
• Sandvine, a DPI competitor, was bought by private equity for 2.8x sales a few years ago.
• Allot's security business has 18 customers so far with lots of revenue and profitability potential.

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Allot Ltd (NASDAQ:ALLT) has had a rough run over the past year. The company has lowered revenue guidance for its security business multiple times and has lost credibility with the Street. Its stock has traded from a high of $20 a year ago to $5.30 today. So why should you care about Allot in its current state?

Allot's main product sits in service provider networks and inspects each packet of data that flows through the network. This is a challenging task and only a couple of players in the world can do it at scale for the largest service providers. This product is used by Allot for two different use cases. The first is commonly known as Deep Packet Inspection (DPI) where customers use the product to know what kind of traffic is passing through the network. Service provider customers can use this knowledge to bill for different service plans, throttle traffic above set customer limits, and eliminate malicious traffic. Government customers can use the product to monitor terrorism and child pornography.

The two main players in DPI are Allot and Sandvine Corporation. Sandvine was taken private in 2017 by Francisco Partners and then was combined with another private competitor, Procera Networks. This combination of companies led to confusion in the market and Allot was able to gain market share and is still benefiting from this situation. Francisco paid 2.8x sales for Sandvine.

Allot's other use case for its product is for a retail and SMB security service. Vodafone has been a big customer for years where, for a small monthly fee from its retail subscribers, it eliminates malware, ransomware, and phishing attacks in the network so they never get to the users' devices. The Vodafone contract was a perpetual one where Allot sold them the product on a one time basis for a certain number of users and then added to that over time as Vodafone went beyond its user threshold. Vodafone has had great success with this service, driving penetration of over 50% in some of its markets.

Erez Antebi came in as a new CEO of Allot in 2017. He saw Vodafone's success and wanted a bigger piece of it for Allot in future contracts with other customers. He set up a Security-as-a-Service (SECaaS) model where Allot installs the equipment and then shares in the monthly fee charged to users. This was a bit of a tough sell at first as service providers did not want to share revenue but has caught on more recently. Allot has signed up 18 SECaaS customers since launching this model. This part of the business has been slow out of the gate as the service providers have been slow to roll it out and some have started with a freemium model that has lacked revenue for Allot in the beginning. This business is currently losing money as Allot provides all of the initial equipment for free and gains profitability as subscriber numbers scale.

So again to my earlier question, why care about Allot at these levels? As there are two separate use cases and businesses here, it makes sense to look at Allot on a sum-of-the-parts basis. The DPI use case makes up nearly all of the business at this point and with Allot's current market cap, it trades at 0.7x sales on an EV/Sales basis, and, according to the company, runs at a 10-15% operating margin. I would argue that it is worth at least what Sandvine was when it was acquired, if not more as it is gaining market share. Putting a 2.8x multiple on Allot's DPI revenue gets you to a valuation of $465 million or $12.68 per share, 140% above current depressed levels. Then you are getting the SECaaS business for free. So what is that business with its 18 already signed customers worth? Allot discloses a metric for its signed security customer called Maximum Annual Revenue or MAR. This metric reflects what annual revenue Allot would earn from these customers at 100% penetration. Obviously no customers get to 100% penetration but it gives you some sense of customer scale. On a cumulative basis, adjusted for the recent more conservative stance on it, this number is $235 million. Assuming Allot can eventually get 25% penetration with these customers this would amount to $59 million in annual recurring revenue. What multiple to put on this? In today's tough tech market, I would say a 3x multiple is appropriate. This adds another $177 million to the valuation, giving you a total value of $640 million, or $17.60 per share, or 230% appreciation from current levels.

Disclosure: I/we have a beneficial long position in the shares of ALLT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.