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Allot Communications To See Solid Q2

By: Investor's Business Daily
Posted: 7/27/2012 2:37:00 PM
Referenced Stocks: ALLT;CSCO;ERIC

If you've ever driven through Times Square during rush hour, you know what it's like to be in a real traffic jam. Horns blasting, pedestrians crossing between cars, cars swerving.

Allot Communications ( ALLT ) can't get rid of Manhattan's rush-hour gridlock. But it does help assure traffic runs more smoothly and efficiently over carrier networks.

Allot's hardware and software allow fixed and mobile carriers and businesses to manage network traffic according to the nature of the content and its importance and end-user preference.

Its products use a proprietary deep packet inspection technology, or DPI, to monitor and manage bandwidth consumption. DPI technology identifies what type of applications, or traffic, comes over the network and where to route it to make the network more efficient to use.

The Israel-based company says the ability to identify, distinguish and prioritize different applications lets service providers optimize bandwidth usage and reduce operational costs, while maintaining a high service quality.

Three Billion Smartphones

Allot's products have been in big demand as data traffic on carrier networks has exploded. You can thank the world's 700 million smartphone subscribers for the increase, says Northland Capital Markets analyst Catharine Trebnick. That number, she says, is expected to climb to 3 billion by 2017.

"One of the reasons why the carriers need to buy Allot's equipment is they can optimize and make their networks more efficient," she said. "It's a less expensive solution to making the network more efficient than adding more base stations."

Customers, she says, see a return on their investment from Allot's products within nine to 12 months of installation.

That partly explains why Allot has been enjoying a booming business, even in a tight capital spending environment.

"Allot has had spectacular revenue and earnings growth," said analyst Matt Robison of Wunderlich Securities, which has an investment banking relationship with Allot. "The reason is operators are not so interested in expanding capacity, but in spending on productivity. They're bringing customers an operating advantage. That enables Allot to flourish, despite tough economic conditions for the broader communications infrastructure industry."

In the first quarter, Allot handily beat views on both sales and profits. Earnings popped 88% to 15 cents a share, breaking a string of five straight quarters of triple-digit growth. Sales climbed 41% to $24.2 million. It's the fastest growth it's seen since the fourth quarter of 2010.

During the quarter, Allot received big orders from 17 large service providers, five of which were from new customers. Seven of these orders were from mobile operators.

If followers are right, Allot should post another solid showing when it reports second-quarter results July 31. Analysts polled by Thomson Reuters expect Allot to show a 40% rise in second-quarter earnings to 14 cents a share.

Street Estimates

Trebnick expects results to be in line with Wall Street's estimates.

"It offers a solution that can easily alleviate bandwidth problems and set up operators for future new revenue generating services such as charging end users for Facebook access at $5 a month," she said.

Allot's second-quarter results follow an acquisition that should enhance its offerings.

In May, Allot bought Ortiva Wireless, which specializes in optimizing video that comes across wireless networks for an undisclosed sum. Integrating Ortiva's technology with Allot's Service Gateway platform will allow mobile service providers to effectively manage the increasing volume of video traffic on their networks, says the company. Allot's Global MobileTrends report shows that video represents 42% of mobile data traffic worldwide.

Allot expects the buy to be accretive on a quarterly basis by the end of 2012. It sees it contributing $3 million to $5 million in revenue for the 2012 second half. Allot estimates operating expenses tied to the buy will be roughly $2.5 million per quarter for the year's second half.

Video Traffic

The acquisition brings Allot an additional capability, which is managing video traffic on mobile networks, says Trebnick. It helps Allot address a growing trend, she adds, which is the expediential growth of video traffic.

It's important Allot keeps up with market trends, considering its rivals include router and switch infrastructure giants such asCisco Systems ( CSCO ),Ericsson ( ERIC ) and Huawei Technologies.

Allot has a strong exposure to some trouble spots on the map. Europe accounted for 50% of 2011 revenue and 12% came from the Middle East and Africa. Some 17% was from Asia and Oceania and 12% was from the U.S.

Robison noted in a recent report that Allot has the most European concentration of any company in his communications technology coverage.

"However, checks indicate the economy in Europe is not slowing down for Allot due to the rapid return on investment that is benefiting Allot customers," he wrote. "In addition, we believe the company is experiencing acceleration in the Americas that will more than offset any near-term lumpiness in other regions."

Analysts surveyed by Thomson Reuters expect full-year earnings to rise 33% to 61 cents a share. That would follow a 171% jump in profits in 2011 and 383% surge in 2010.