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All - I don't normally post reports on individual stocks. But, I've got a modest stake in this small Israel cybersecurity company, called Allot LTD. (Yahoo profile here)
Full disclosure, I'm long about 1,300 shares of this stock.
Posting this here in case any forums members have a position in this stock, or any members of the general public need more information about it.
Allot: Verizon Expansion And Strong Results Make For A Buying Opportunity
Summary
Allot's Q4 Marked A Continuation Of The Turnaround
Allot's solid Q4 results attested to the continued turnaround of the business, with quarterly EPS of $.05, positive free cash flow of $4 million, and approximately 50% SECaaS revenue growth. Allot has now generated positive free cash flow for three consecutive quarters, and reached profitability in the last two quarters. Notably, Allot achieved this in 2024 despite virtually flat year over year revenues, highlighting the significant operating leverage that exists in the business after the company's 2023 restructuring. SECaaS continued its strong growth trajectory in Q4, while DNI revenue registered a 4% YoY decline. For the full year 2024, SECaaS revenue grew 55% to reach $16.7 million and ARR grew 43% to reach $18.3 million; DNI revenue declined 8% to $75.6 million:
Verizon BMIS Confirmed
The most significant item in the Q4 earnings release was the confirmation of Allot’s recent SECaaS win at Verizon for Business Mobile Internet Security, which we correctly identified and previewed in our December article. As we discussed at the time, this win massively expands the pool of Verizon subscribers addressable with Allot's solutions to the ~30.5 million Verizon business mobile subscribers, up significantly from the ~1.5 million Verizon business FWA subscribers that Allot was selling into before. Best of all, confirmation came in the form of a joint press release and a glowing quote from a senior Verizon executive, making it clear that Verizon strongly endorses Allot’s solution. While details of Verizon’s planned go-to-market strategy for BMIS and the potential adoption / attach rates of the service were not disclosed, CEO Eyal Harari made it clear that the opportunity is very large, stating on Allot's Q4 earnings call: “this could be an amazing opportunity for us to really scale our security service offering to millions of customers.” In sum, Q4 was another proof point in Allot’s continued turnaround, coupled with great news on Verizon, all of which confirmed our initial thesis is on track.
Drivers of Recent Stock Price Correction
Since our initial November 29, 2024 article, ALLT shares had more than doubled from $4.37 / share to over $9.00 / share through late January, as investors came to better appreciate the story and as CEO Eyal Harari hosted investor meetings at the Northland and Needham conferences. Shares then corrected by approximately 30% heading into the Q4 earnings report, likely driven by anxiety surrounding the as-yet unannounced Verizon expansion and profit taking. After rallying by over 15% following the earnings report and Verizon announcement Tuesday, Allot then fell further on Wednesday and Thursday, reaching a recent trough of $5.60 on Feb 28, 2025, still up nearly 30% from our initial article in November but representing a 40% correction from the highs.
One aspect of the correction is likely technical: Allot shares had appreciated by approximately 3x in 2024 and January’s 50% rally took the RSI to a high of 86 and an average of well over 70 throughout the month. The recent correction has also coincided with a risk-off move in crowded momentum stocks. When combined with relatively thin trading volumes and a dearth of analyst coverage, Allot suffered from a classic sell-the-news reaction in the run-up to Q4 earnings and the announcement of Verizon BMIS.
Fundamentally, there are also a few reasons why certain investors might have found the Q4 print disappointing:
Q4 DNI Results
Addressing each in turn, we believe Allot’s DNI revenue outlook for stable performance in 2025 is conservative. On the Q4 call, Mr. Harari noted of the DNI business “we have a solid pipeline in 2025, and we believe there is a potential for upside,” which squares with our own research. When pressed on DNI growth by Northland analyst Nehal Chokshi on the Q4 call, Mr. Harari again emphasized “there could be an upside due to some current pipeline deals that we have.” KWM CIO David Kanen elicited yet another bullish response from Mr. Harari when asking about Sandvine issues impacting Allot’s pipeline:
“If you ask me whether there could be an upside? Definitely, there could be an upside. It really depends on winning the new projects and the timing of the revenue. We do see more opportunities in the pipeline based on our engagement with different customers. We do invest in -- and part of the change to move into regional structure will give us more market focus and more engagement with customers that we see that generate some nice opportunities in the pipeline. But this being said, predictability of this business is much lower and visibility is different because we -- it's not recurrent business, and it really depends on if we win the project or not. So currently, we estimate a similar level, but it could be an upside based on some customer success and it depends on the scale of the projects we win.”
ALLT took a critical first step towards reestablishing credibility with investors by exceeding quarterly estimates in each quarter of 2024, and by securing a marquee SECaaS expansion deal with Verizon; its shares were rewarded with significant 300% appreciation over the course of 2024 and continued gains in early 2025. While it is true that visibility in the DNI business is lower as it is not a recurring revenue business, this is precisely why we believe management chose to issue a conservative outlook. However, the following factors make us confident that Allot is well positioned for DNI upside in 2025 and beyond:
Q4 SECaaS Results
While Allot’s year over year revenue SECaaS growth in Q4 was robust at ~50%, quarterly ARR growth decelerated from a sequential increase of ~$2.2 million in Q3, to $1.1 million in Q4, and the lack of formal guidance may have concerned new investors. Here are some factors we believe contributed to Q4’s relatively slower rate of growth as compared to Q3:
While investors could certainly nitpick at the quarter itself given the dynamics highlighted above, we believe the Q4 earnings call contained some very positive information that bodes well for SECaaS revenue growth in 2025 and beyond, which is much more important for Allot’s valuation than a single quarter. As noted, CEO Eyal Harari repeatedly emphasized the positive go forward impact from Allot’s partnership with Verizon for Business Mobile, stating
“Since late 2022, we have partnered with Verizon to provide our network-based cybersecurity protection to Verizon Business fixed wireless access customers giving 1.5 million subscriber the option to use our service. This service has experienced strong adoption over the past year and continues to grow among the Verizon Business customer base. This new agreement makes our solution potentially available to the extended Verizon Business mobile customer base. As of 2024 year-end, Verizon Business reported over 30 million subscribers, representing a significant targeted addressable market and long-term growth opportunity for Allot. Our Network Secure product will support Verizon business to expand security capabilities, offering these customers zero touch protection from a wide range of cyber threats. We have built a solid, strong working relationship with Verizon Business, and we hope to extend our collaboration with them further over the coming years.”
In these remarks, Mr. Harari alluded to deepening the partnership with Verizon Business even beyond the BMIS partnership, hinting at additional revenue generation opportunities for Allot in the years to come. Specifically to BMIS, Verizon’s gross business mobile adds for 2024 (which we view as one proxy for customer conversion opportunities) were 6.5 million, in line with the math we shared in our December article.
Mr. Harari also noted the success of Allot’s partnership with Vodafone in powering its Securenet Home product, stating: “In November, we announced a new contract with Vodafone UK and our relationship with them continues to grow. Together, we launched our protection service to fixed broadband customers, complementing the cybersecurity protection they already provide their mobile customers, all built on Allot services. Our solution enhances threat protection across both Vodafone UK mobile and broadband networks and of course all customer devices on the home network. In only a few months since launch, our solution has gained strong traction and notably increased customer satisfaction in Vodafone UK.” Customer satisfaction or net promoter score (NPS) is an important metric in the telecom industry given its correlation to the highly impactful financial KPI of subscriber churn. As our prior articles highlighted, not only can telecom operators boost their revenues with Allot’s network native security products, they can also reduce churn rates, increasing customer LTV both from the revenue and cost side of the ledger. Specifically at Vodafone, we believe Allot has significant revenue growth opportunities in 2025 as its new SECaaS-based partnership rolls out across additional territories besides the UK.
In addition to its Vodafone and Verizon partnerships, we believe Allot’s SECaaS solutions are prospering at several other telecom carriers, including Taiwan FarEasTone (FET), which first signed up with Allot in December 2022. A slide from FET’s recent earnings presentation highlights how its Allot-powered Guardian Network service has rapidly grown, boosting revenues for FET and becoming a key part of the carriers’ brand identity in the competitive Taiwanese mobile market. We think Allot’s strong performance with SECaaS at FET has the potential to manifest in other areas of the business, for example by helping to foster a “secure internet” DNI project with the Taiwanese government itself – notably, Allot highlighted a visit to the company headquarters by the Taiwanese ambassador to Israel in February on its Company LinkedIn Page.
Mr. Harari also mentioned the potential for new SECaaS launches in 2025, stating: “We have a strong pipeline of opportunities that we are working on, some of which we hope to convert to new contracts in the coming quarters.”
The bottom line is that SECaaS continued to grow rapidly driven by existing partnerships in 2024, ahead of what, we believe, will be an even more exciting 2025 and 2026 as existing growth is supplemented by step function opportunities with Vodafone and Verizon BMIS. Best of all, this business will scale at extremely high incremental profit margins in the years ahead, as noted by Mr. Harari: “And long term, we expect [gross margin] to further improve with scale and with more revenue portion coming from [SECaaS] that in general, it's higher gross margin by nature because this is a service as opposed to the smart product line that sometimes has higher cost components.”
2025-2028 Projections
At this point, on the back of the formal announcement of BMIS and given management's margin and cost outlook for 2025, we have sufficient visibility and confidence to roll out our 2025 – 2028 financial projections for Allot. Given the high incremental margins associated with SECaaS revenue growth, and the more conservative tone on DNI, our 2028 revenue projection is unchanged in the aggregate, but a higher mix of SECaaS vs. DNI revenue boosts our operating margin and earnings projection by nearly 2x. Our model assumes Verizon BMIS begins to contribute in Q3 of 2025 with a 25% attach rate against business mobile gross adds (in line with the derived attach rate for SECaaS against total Verizon business FWA gross adds we shared in our December article) and includes some impact from the new SECaaS agreement with Vodafone, which we expect to contribute more significantly to revenue growth over the coming years:
If these projections are attained, we believe there is likely to be material upside beyond our previously established 2027 year-end price target of $48 for Allot shares.
Verizon Looks Set to Lean In to Allot Partnership
In our December article, we highlighted the potential for Verizon to proceed more aggressively with BMIS than by solely selling to new business mobile gross adds, writing:
“An additional upside driver not captured by our projections is the prospect for Verizon to initiate a significant outbound sales motion around BIS and BMIS, offering Allot’s solutions proactively rather than reactively to net new customers…While not in our base case, we believe this scenario is quite likely to transpire because Verizon business customers that sign up for a network native security product provided by Verizon that is zero touch, affordable, and high efficacy – but also endemic to the network and not portable to other networks – will be less likely to churn than other customers. Since churn is the single most powerful lever in any subscription business model, Verizon could look at outbound BMIS sales as not only a revenue generator (after all, at full penetration Verizon would stand to earn over $700 million in revenue from BMIS), but as an initiative boost to customer loyalty and retention. Furthermore, we believe there should be strong customer demand for the solution: consider that for a company like Coca-Cola with ~80,000 US employees, a firm wide BMIS license would cost ~$2 million, real money to Verizon and Allot but still just a tiny sliver of Coke’s $550 million IT budget in exchange for a meaningful boost in protection against ransomware, phishing and other compromises that could potentially cost the money far more in direct costs and negative PR.”
Verizon and Allot’s joint press release for BMIS -- which did not position the solution as being solely for SMBs -- was encouraging in this regard, as was a recent LinkedIn comment from Verizon’s AVP of Security Products Jennifer Varner that stated: "Making security protection simple and natively accessible to those using Verizon’s mobile network can help organizations of all sizes defend against Social Engineering and Cybersecurity attacks. We appreciate the partnership with Eyal Harari Moshe Moran and look forward to bringing a better protected future together." This commentary, particularly the emphasis on "organizations of all sizes" -- language potentially denoting both enterprise and SMB customers -- seems to bode well for Verizon’s go-to market strategy with the product, which we expect to be formally unveiled in the coming months.
Conclusion
Q4 was a strong quarter of progress for Allot ahead of what, we believe, will be a banner 2025 and beyond for the company. The formally announced and expanded partnership with Verizon greatly improves the risk / adjusted return profile for the stock in our opinion and should boost investor confidence that Allot's strong SECaaS growth will prove sustainable over the long term. Bullish commentary by Eyal Harari on Allot's DNI sales pipeline and product development pipeline also bodes well for that business. As such, we believe the recent correction in the stock will prove short-lived and recommend that long-term oriented investors like ourselves add to positions.
Supplemental: Risk Factors
Obviously, businesses and stocks all face certain risks. In Allot's case, we think there are a few in particular that bear monitoring. Happily, we were able to delete our top risk factor from our last article (Allot Might Not Power BMIS):
https://seekingalpha.com/article/476...ng-opportunity
Full disclosure, I'm long about 1,300 shares of this stock.
Posting this here in case any forums members have a position in this stock, or any members of the general public need more information about it.
Allot: Verizon Expansion And Strong Results Make For A Buying Opportunity
Summary
- Allot's Q4 results highlight a continued turnaround with positive free cash flow, profitability, and significant SECaaS revenue growth, despite flattish overall revenues.
- The Verizon BMIS confirmation significantly expands Allot's addressable market, potentially scaling their security service to millions of Verizon business mobile subscribers at accretive pricing.
- Recent stock price correction is likely due to technical factors, profit-taking, and investor anxiety, however Allot's fundamentals continue to strengthen.
- Allot's partnerships with Verizon and Vodafone, along with a robust pipeline of business, position it for substantial SECaaS and DNI revenue growth in 2025 and beyond.
- Coming out of Q4, we raised our long-term operating income projections and have high confidence that 2025 will be a year of material revenue and profitability growth.
Allot's Q4 Marked A Continuation Of The Turnaround
Allot's solid Q4 results attested to the continued turnaround of the business, with quarterly EPS of $.05, positive free cash flow of $4 million, and approximately 50% SECaaS revenue growth. Allot has now generated positive free cash flow for three consecutive quarters, and reached profitability in the last two quarters. Notably, Allot achieved this in 2024 despite virtually flat year over year revenues, highlighting the significant operating leverage that exists in the business after the company's 2023 restructuring. SECaaS continued its strong growth trajectory in Q4, while DNI revenue registered a 4% YoY decline. For the full year 2024, SECaaS revenue grew 55% to reach $16.7 million and ARR grew 43% to reach $18.3 million; DNI revenue declined 8% to $75.6 million:
Verizon BMIS Confirmed
The most significant item in the Q4 earnings release was the confirmation of Allot’s recent SECaaS win at Verizon for Business Mobile Internet Security, which we correctly identified and previewed in our December article. As we discussed at the time, this win massively expands the pool of Verizon subscribers addressable with Allot's solutions to the ~30.5 million Verizon business mobile subscribers, up significantly from the ~1.5 million Verizon business FWA subscribers that Allot was selling into before. Best of all, confirmation came in the form of a joint press release and a glowing quote from a senior Verizon executive, making it clear that Verizon strongly endorses Allot’s solution. While details of Verizon’s planned go-to-market strategy for BMIS and the potential adoption / attach rates of the service were not disclosed, CEO Eyal Harari made it clear that the opportunity is very large, stating on Allot's Q4 earnings call: “this could be an amazing opportunity for us to really scale our security service offering to millions of customers.” In sum, Q4 was another proof point in Allot’s continued turnaround, coupled with great news on Verizon, all of which confirmed our initial thesis is on track.
Drivers of Recent Stock Price Correction
Since our initial November 29, 2024 article, ALLT shares had more than doubled from $4.37 / share to over $9.00 / share through late January, as investors came to better appreciate the story and as CEO Eyal Harari hosted investor meetings at the Northland and Needham conferences. Shares then corrected by approximately 30% heading into the Q4 earnings report, likely driven by anxiety surrounding the as-yet unannounced Verizon expansion and profit taking. After rallying by over 15% following the earnings report and Verizon announcement Tuesday, Allot then fell further on Wednesday and Thursday, reaching a recent trough of $5.60 on Feb 28, 2025, still up nearly 30% from our initial article in November but representing a 40% correction from the highs.
One aspect of the correction is likely technical: Allot shares had appreciated by approximately 3x in 2024 and January’s 50% rally took the RSI to a high of 86 and an average of well over 70 throughout the month. The recent correction has also coincided with a risk-off move in crowded momentum stocks. When combined with relatively thin trading volumes and a dearth of analyst coverage, Allot suffered from a classic sell-the-news reaction in the run-up to Q4 earnings and the announcement of Verizon BMIS.
Fundamentally, there are also a few reasons why certain investors might have found the Q4 print disappointing:
- As mentioned, DNI revenue declined 4% YoY in Q4, and 2024 product revenue reached just $30 million, well below the 10-year average of $60+ million and the 2021 peak of $98 million. Given Sandvine’s struggles – which we highlighted in detail in our November article – and the recent launch of the Tera Service Gateway III, we think investors might have hoped to see more strength out of DNI in Q4. Furthermore, DNI revenue was informally guided to be “stable” in 2025, albeit with “potential for upside.”
- SECaaS revenue in Q4 grew only $100k q/q, as compared to $1 million q/q in Q3. While this growth was impacted adversely by FX and Allot had also called out one-time strength in Q3 from “catch up” payments associated with a new SECaaS customer contract, some investors could have conflated the slower growth with slowing momentum in the business. SECaaS revenue was guided for continued high double-digit growth, which was somewhat ambiguous, although consistent with Allot’s 2024 outlook that originally called for “double digit SECaaS growth.”
Q4 DNI Results
Addressing each in turn, we believe Allot’s DNI revenue outlook for stable performance in 2025 is conservative. On the Q4 call, Mr. Harari noted of the DNI business “we have a solid pipeline in 2025, and we believe there is a potential for upside,” which squares with our own research. When pressed on DNI growth by Northland analyst Nehal Chokshi on the Q4 call, Mr. Harari again emphasized “there could be an upside due to some current pipeline deals that we have.” KWM CIO David Kanen elicited yet another bullish response from Mr. Harari when asking about Sandvine issues impacting Allot’s pipeline:
“If you ask me whether there could be an upside? Definitely, there could be an upside. It really depends on winning the new projects and the timing of the revenue. We do see more opportunities in the pipeline based on our engagement with different customers. We do invest in -- and part of the change to move into regional structure will give us more market focus and more engagement with customers that we see that generate some nice opportunities in the pipeline. But this being said, predictability of this business is much lower and visibility is different because we -- it's not recurrent business, and it really depends on if we win the project or not. So currently, we estimate a similar level, but it could be an upside based on some customer success and it depends on the scale of the projects we win.”
ALLT took a critical first step towards reestablishing credibility with investors by exceeding quarterly estimates in each quarter of 2024, and by securing a marquee SECaaS expansion deal with Verizon; its shares were rewarded with significant 300% appreciation over the course of 2024 and continued gains in early 2025. While it is true that visibility in the DNI business is lower as it is not a recurring revenue business, this is precisely why we believe management chose to issue a conservative outlook. However, the following factors make us confident that Allot is well positioned for DNI upside in 2025 and beyond:
- Tera Service Gateway III, unveiled in December, is the first major product refresh for the DNI portfolio in years, and is likely to drive a refresh cycle at Allot’s large service provider customers. We note that DNI product revenue previously declined by from $81m in 2014 to $49m in 2017 before growing 100% to $98m in 2021 on the back of a strong product cycle.
- While Sandvine was removed from the US Entity List last year, the company was forced to file bankruptcy and its stalking horse sale process failed to yield an alternative buyer to the existing lenders, led by Brigade Agency Services. A January cash flow forecast prepared by Sandvine’s financial consultant showed the business essentially in run-off mode with substantial cash burn even after laying off 50% of employees. The choice potential DNI customers have between selecting a strong, free cash flow positive market leader in Allot – with the added benefit of gaining access to its new Tera Service Gateway III and its integrated cybersecurity products – and selecting a cash burning, bankrupt company (Sandvine) with significant reputational damage from the scandals that landed it on the entity list in the first place should not be a difficult one. While some Sandvine customers, particularly those in more price sensitive markets, will end up selecting integrated DNI from vendors like Huawei or ZTE, we believe significant numbers of Sandvine's tier-1 service provider and government customers will also migrate to Allot. Based on Sandvine's disclosed roster of customers, we estimate the "served addressable market" of Sandvine revenue Allot can realistically hope to replace is probably around $100m of Sandvine's prior $200m in annual sales. However, landing even 20% of this business has the potential to generate a near 70% increase in product revenue from 2024's trough levels.
- Allot’s new management, led by CEO Eyal Harari has emphasized that Allot will bring unique and differentiated new network intelligence and cybersecurity products to market, including product that will be marketed on a recurring revenue basis, which has the potential to further reignite sustainable revenue growth in the DNI segment.
Q4 SECaaS Results
While Allot’s year over year revenue SECaaS growth in Q4 was robust at ~50%, quarterly ARR growth decelerated from a sequential increase of ~$2.2 million in Q3, to $1.1 million in Q4, and the lack of formal guidance may have concerned new investors. Here are some factors we believe contributed to Q4’s relatively slower rate of growth as compared to Q3:
- First, as Mr. Harari highlighted on Allot’s Q3 earnings call in November, Q3 SECaaS revenues benefitted from some one-time dynamics that we believe related to a new contract signed with a European operator: “As you could see, this quarter, we had higher revenue for the SECaaS compared to the ARR. And this is due to some catch-up revenue we had with one of the customers that paid us some services that are not recurring for the future.” Indeed, we had highlighted this ourselves in our November article, writing “we are modeling Q4 2024 SECaaS as flat given outsized strength in Q3 including from some catch-up revenues.” As such, Q4 SECaaS revenue did outperform our projections by ~$100k.
- We believe FX also weighed on Q4 results, with the majority of Allot’s SECaaS revenues coming from customers whose revenues are denominated in EUR, GBP, or TWD, all of which depreciated significantly versus the US Dollar during Q4. Adjusting for FX, we believe Allot’s SECaaS ARR would have come in approximately $1 million higher, with Q4 ARR growth of ~52%:
- Finally, while Verizon BMIS launched in December 2024 and was announced along with the Q4 earnings release, we believe the launch was in pilot mode as Verizon gathered data about the new service and prepared its own go-to-market strategy, and as such did not generate material new revenues for Allot during Q4.
While investors could certainly nitpick at the quarter itself given the dynamics highlighted above, we believe the Q4 earnings call contained some very positive information that bodes well for SECaaS revenue growth in 2025 and beyond, which is much more important for Allot’s valuation than a single quarter. As noted, CEO Eyal Harari repeatedly emphasized the positive go forward impact from Allot’s partnership with Verizon for Business Mobile, stating
“Since late 2022, we have partnered with Verizon to provide our network-based cybersecurity protection to Verizon Business fixed wireless access customers giving 1.5 million subscriber the option to use our service. This service has experienced strong adoption over the past year and continues to grow among the Verizon Business customer base. This new agreement makes our solution potentially available to the extended Verizon Business mobile customer base. As of 2024 year-end, Verizon Business reported over 30 million subscribers, representing a significant targeted addressable market and long-term growth opportunity for Allot. Our Network Secure product will support Verizon business to expand security capabilities, offering these customers zero touch protection from a wide range of cyber threats. We have built a solid, strong working relationship with Verizon Business, and we hope to extend our collaboration with them further over the coming years.”
In these remarks, Mr. Harari alluded to deepening the partnership with Verizon Business even beyond the BMIS partnership, hinting at additional revenue generation opportunities for Allot in the years to come. Specifically to BMIS, Verizon’s gross business mobile adds for 2024 (which we view as one proxy for customer conversion opportunities) were 6.5 million, in line with the math we shared in our December article.
Mr. Harari also noted the success of Allot’s partnership with Vodafone in powering its Securenet Home product, stating: “In November, we announced a new contract with Vodafone UK and our relationship with them continues to grow. Together, we launched our protection service to fixed broadband customers, complementing the cybersecurity protection they already provide their mobile customers, all built on Allot services. Our solution enhances threat protection across both Vodafone UK mobile and broadband networks and of course all customer devices on the home network. In only a few months since launch, our solution has gained strong traction and notably increased customer satisfaction in Vodafone UK.” Customer satisfaction or net promoter score (NPS) is an important metric in the telecom industry given its correlation to the highly impactful financial KPI of subscriber churn. As our prior articles highlighted, not only can telecom operators boost their revenues with Allot’s network native security products, they can also reduce churn rates, increasing customer LTV both from the revenue and cost side of the ledger. Specifically at Vodafone, we believe Allot has significant revenue growth opportunities in 2025 as its new SECaaS-based partnership rolls out across additional territories besides the UK.
In addition to its Vodafone and Verizon partnerships, we believe Allot’s SECaaS solutions are prospering at several other telecom carriers, including Taiwan FarEasTone (FET), which first signed up with Allot in December 2022. A slide from FET’s recent earnings presentation highlights how its Allot-powered Guardian Network service has rapidly grown, boosting revenues for FET and becoming a key part of the carriers’ brand identity in the competitive Taiwanese mobile market. We think Allot’s strong performance with SECaaS at FET has the potential to manifest in other areas of the business, for example by helping to foster a “secure internet” DNI project with the Taiwanese government itself – notably, Allot highlighted a visit to the company headquarters by the Taiwanese ambassador to Israel in February on its Company LinkedIn Page.
Mr. Harari also mentioned the potential for new SECaaS launches in 2025, stating: “We have a strong pipeline of opportunities that we are working on, some of which we hope to convert to new contracts in the coming quarters.”
The bottom line is that SECaaS continued to grow rapidly driven by existing partnerships in 2024, ahead of what, we believe, will be an even more exciting 2025 and 2026 as existing growth is supplemented by step function opportunities with Vodafone and Verizon BMIS. Best of all, this business will scale at extremely high incremental profit margins in the years ahead, as noted by Mr. Harari: “And long term, we expect [gross margin] to further improve with scale and with more revenue portion coming from [SECaaS] that in general, it's higher gross margin by nature because this is a service as opposed to the smart product line that sometimes has higher cost components.”
2025-2028 Projections
At this point, on the back of the formal announcement of BMIS and given management's margin and cost outlook for 2025, we have sufficient visibility and confidence to roll out our 2025 – 2028 financial projections for Allot. Given the high incremental margins associated with SECaaS revenue growth, and the more conservative tone on DNI, our 2028 revenue projection is unchanged in the aggregate, but a higher mix of SECaaS vs. DNI revenue boosts our operating margin and earnings projection by nearly 2x. Our model assumes Verizon BMIS begins to contribute in Q3 of 2025 with a 25% attach rate against business mobile gross adds (in line with the derived attach rate for SECaaS against total Verizon business FWA gross adds we shared in our December article) and includes some impact from the new SECaaS agreement with Vodafone, which we expect to contribute more significantly to revenue growth over the coming years:
If these projections are attained, we believe there is likely to be material upside beyond our previously established 2027 year-end price target of $48 for Allot shares.
Verizon Looks Set to Lean In to Allot Partnership
In our December article, we highlighted the potential for Verizon to proceed more aggressively with BMIS than by solely selling to new business mobile gross adds, writing:
“An additional upside driver not captured by our projections is the prospect for Verizon to initiate a significant outbound sales motion around BIS and BMIS, offering Allot’s solutions proactively rather than reactively to net new customers…While not in our base case, we believe this scenario is quite likely to transpire because Verizon business customers that sign up for a network native security product provided by Verizon that is zero touch, affordable, and high efficacy – but also endemic to the network and not portable to other networks – will be less likely to churn than other customers. Since churn is the single most powerful lever in any subscription business model, Verizon could look at outbound BMIS sales as not only a revenue generator (after all, at full penetration Verizon would stand to earn over $700 million in revenue from BMIS), but as an initiative boost to customer loyalty and retention. Furthermore, we believe there should be strong customer demand for the solution: consider that for a company like Coca-Cola with ~80,000 US employees, a firm wide BMIS license would cost ~$2 million, real money to Verizon and Allot but still just a tiny sliver of Coke’s $550 million IT budget in exchange for a meaningful boost in protection against ransomware, phishing and other compromises that could potentially cost the money far more in direct costs and negative PR.”
Verizon and Allot’s joint press release for BMIS -- which did not position the solution as being solely for SMBs -- was encouraging in this regard, as was a recent LinkedIn comment from Verizon’s AVP of Security Products Jennifer Varner that stated: "Making security protection simple and natively accessible to those using Verizon’s mobile network can help organizations of all sizes defend against Social Engineering and Cybersecurity attacks. We appreciate the partnership with Eyal Harari Moshe Moran and look forward to bringing a better protected future together." This commentary, particularly the emphasis on "organizations of all sizes" -- language potentially denoting both enterprise and SMB customers -- seems to bode well for Verizon’s go-to market strategy with the product, which we expect to be formally unveiled in the coming months.
Conclusion
Q4 was a strong quarter of progress for Allot ahead of what, we believe, will be a banner 2025 and beyond for the company. The formally announced and expanded partnership with Verizon greatly improves the risk / adjusted return profile for the stock in our opinion and should boost investor confidence that Allot's strong SECaaS growth will prove sustainable over the long term. Bullish commentary by Eyal Harari on Allot's DNI sales pipeline and product development pipeline also bodes well for that business. As such, we believe the recent correction in the stock will prove short-lived and recommend that long-term oriented investors like ourselves add to positions.
Supplemental: Risk Factors
Obviously, businesses and stocks all face certain risks. In Allot's case, we think there are a few in particular that bear monitoring. Happily, we were able to delete our top risk factor from our last article (Allot Might Not Power BMIS):
- BMIS Revenue Generation might be delayed: While we continue to believe the Verizon Business Mobile Internet Security deal is the most significant deal in Allot's history, Verizon is a large company and any new launch is subject to potential push outs. Indeed, we would not be terribly surprised if Verizon postponed the formal launch of BMIS for a quarter or two, and while this would not change our long-term thesis, it could certainly dent Allot's near-term SECaaS revenue momentum.
- Execution Risk: As noted above, Allot has successfully executed on its turnaround so far and the Company has turned the corner to be cash flow positive. We think management's plan to integrate the DNI and cybersecurity business units to better leverage Allot's technology and talent makes a lot of sense, but any such integration can disrupt an organization in the short term. In Allot's case, since the Company already went through a much more serious reorganization in 2023, we think the new integration carries a relatively minor risk of disruption. However, if 2025 DNI revenue does not return to growth, it could indicate deeper issues.
- Large Customer Risk: Since the Company's founding in the 1990s, Allot has worked with large telecom carrier customers, many of whom have remained with Allot over decades, testifying to the Company's strong technology and client service. Vodafone in particular is a longstanding customer of Allot's that, as noted above, recently expanded its contract with Allot for Home Security and for mobile SECaaS. We have also discussed that while Allot's SECaaS revenue is currently quite diversified and no SECaaS customer currently accounts for 10% of total Company revenue, this dynamic could change with Verizon and Vodafone potentially becoming 10% customers in the near future. Allot will have to continue to invest in new technology to excite these customers, and to provide the highest level of customer service and satisfaction to make sure these clients do not experience any major outages from Allot's products (such as was recently experienced by thousands of enterprise and service provider customers due to CrowdStrike's erroneous software update).
- Regulatory Risk: What happened to Sandvine is an example of how powerful technology like DPI / DNI can be misused, and the heavy consequences that can come to those that participate in such abuse. Our research suggests that Allot has made no sales into the key market in question (Egypt) and that Allot has managed its business with a much more scrupulous focus on the end-use of its technology, including by structuring deals such that certain particularly powerful components are not enabled. Importantly, Sandvine was also under the journalistic or regulatory microscope for nearly ten years for aiding and abetting dodgy business practices before the "bell tolled for them" in the form of the US sanctions list. The new Presidential Administration also seems likely to adopt a pro-Israel foreign policy platform, which could be a positive for Allot.
- Geopolitical Instability Risk: Obviously, Israel is a region under immense geopolitical pressure as the country has been at war since October 7, 2023. Allot's employees in Israel must constantly contend with stressful dynamics, including periodic stays in bomb shelters, that most investors could hardly imagine in their day-to-day lives. With that said, the litany of successful Israeli cybersecurity companies that have achieved billion dollar valuations, including Check Point (CHKP), CyberArk, Imperva, Talon and Wiz attests to the fact that Israeli employees have been able to successfully carry on with their lives and build thriving businesses despite these dynamics. Part of Israel's strength in the cybersecurity industry has been its mandatory military service, coupled with its elite "Unit 8200" that serves as a pipeline for the private sector.
https://seekingalpha.com/article/476...ng-opportunity
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