Outerbridge Capital 的 Rory Wallace 谈 Allot 反弹，以及如何评估 Verizon 合作 $ALLT

With me today is my friend, the CIO of Outerbridge Capital, Rory Wallace. Rory, how’s it going?

Going well, Andrew. How are you doing?

Great. Thanks for coming on. I’m super excited to talk about the company we’re going to discuss today, but let me start with a quick disclaimer. Nothing on this podcast is investing advice. That’s always true, but this is an internationally domiciled company that trades locally, and it’s on the smaller side. Both of those carry extra risk, so everybody should remember: this is not financial advice. Consult a financial adviser, do your own work, and all that sort of stuff.

Anyway, Rory, the company we’re going to talk about today is Allot. The ticker is ALLT. I was telling you before we started that I’m super excited to talk about it because, as I was doing my work, I thought, “I can ask questions about whether this is a 10-bagger, or I can ask questions about whether this is dead money for the next 10 years.” I’ll pause there and toss it over to you. What is Allot, and why is it so interesting?

Very well set up there, Andrew. I think it’s been quite a journey at Allot, and you can see that evidenced by the stock price, which, as you mentioned, was worse than dead money for the better part of the last 10 years. It was pretty much in a downtrend, and it’s recently had a significant re-rating. Although the company is still only valued at around $250 million today, it’s playing in a TAM that we think is probably valued at around $10 billion when you aggregate the different markets they’re serving. There’s still a lot of opportunity and a lot to talk about.

At a high level, Allot is a niche networking technology solutions provider to telecom operators. It came up by embedding itself in the core of Tier 1 carrier networks, providing deep-packet-inspection equipment, which is essentially used to scan traffic that goes through the network and then apply policies to that traffic.

For example, there were services like Napster and LimeWire that were very popular back when you and I were a little bit younger. Sandvine was a topical company that we’ll talk about today. They were a provider to Comcast, and Comcast used them to shut down certain power users of Napster and LimeWire, basically to allow the network to have more resources.

There were a whole bunch of things that came out of that at the time. It’s very powerful technology, as you can imagine, scanning every IP packet that goes through the network, being able to discriminate whether it’s Facebook, Twitter, a video game, or an application, and then providing that reporting back to the carrier and applying policies, such as shutting off the user in certain cases or charging different rates for different users.

It’s very powerful, but very niche. Throughout most of the last 20 years, this was about a $500 million TAM for a handful of vendors to participate in. The reason it didn’t really broaden out is that this is sort of a Ferrari-type product. For a lot of operators, sure, they’ll deploy DPI, but they’re not going to grow that deployment necessarily every year. It’s doing for them what they want it to do. They’ll refresh it when there’s a new product cycle, but there wasn’t a lot of growth.

Initially, valuations for these DPI companies had been priced for long-term, sustained growth—call it 5 or 6 times revenue multiples. Then, especially coming out of an upcycle in the 2010 timeframe, there was just stagnation in the market. You saw Sandvine, Procera, and Allot—the 3 publicly traded DPI companies at that point—all enter downturns in their stock prices. Ultimately, Procera and Sandvine merged under the ownership of Francisco Partners, and Allot was left as the last man standing.

The reason I think it’s so interesting right now is that, in addition to that deep-packet-inspection business, which we think is actually starting to develop some real tailwinds going into the next several years, Allot took that incumbency and the trust it had as a provider in the core of the carrier network and expanded outside of it to become a cybersecurity company.

The goal was to deliver cybersecurity solutions to consumers and small businesses that would be installed in the core of the carrier network, require no installation by the end user, and thus achieve a very high adoption rate. In technology, friction is everything. If you have something that has friction to download, install, and patch, you might get very low adoption. But if it’s so easy that I just click a button, it turns on, I’m protected, and there’s no degradation of service, that’s a product that Allot believed every—or a very high rate of—consumers and businesses would want.

They had the vision to expand their market and pivot in that direction. Of course, pivots don’t always come without some turbulence. I’ll turn it back to you, because I’m sure you have questions about what might have gone right and wrong with that pivot into the cybersecurity business they call Security as a Service, or SECaaS.

I actually do have quite a few questions, including on what you just said. But let me start with the question I ask about every company: the market is a really competitive place. There are good articles across the internet, and if you read the company’s filings and listen to the company, you’re going to pick up on the story and SECaaS pretty quickly.

What do you think you’re seeing that the market is missing that makes this a risk-adjusted alpha opportunity, given that they’re not exactly hiding the ball on this?

I think that’s right. You saw a period of disappointment with SECaaS. They had given some very ambitious targets for the business based on having a tentpole deal with Vodafone and assuming they would be able to replicate that same pace of success at every other customer that signed with them.

What ended up happening was that they gave a target of about $25 million for SECaaS revenue in 2022. For a time, there was a lot of excitement from investors who were involved, and they ended up having to take down their numbers for, I think, 8 to 12 straight quarters. It was a very long time in which the numbers consistently came down.

For you, me, and most investors, we look at that type of setup and say, “This thesis must be broken. This product must not actually be as valuable as they say.” The view I have, having done a lot of research, is that they were essentially correct about the value proposition of SECaaS. Where they struggled was with the realistic timeline to implementation and revenue generation. They were just overly optimistic, and unfortunately that optimism filtered down into how they ran the P&L.

You saw a company that was burning cash for a long time. As a function of all that disappointment, the stock dropped to a low level, analysts dropped coverage, and I think a lot of people gave up on the name.

More recently, that’s changed. There are some really good articles you can read on Seeking Alpha, for example, about the situation and how it’s pivoting. But I think where we have a differentiated and contrarian view is that this is a company where, unless you went out and spoke to customers, went to some conferences—they have a big one in Spain called MWC—and got a real pulse of what was going on, you could easily look at the P&L and say, “Revenues are down for 4 years. This is just a secularly declining company. It should probably just be fire-sold.”

Throughout the last couple of years, as we’ve been involved and increased our position, it’s really been a situation where we’ve been hearing very positive things. That included the fact that Verizon was really happy. Verizon, for example, is the largest U.S. Tier 1 carrier, with 100 million consumer mobile lines and 30 million business mobile lines.

They signed a deal with Allot back in 2022, but it didn’t launch until the middle of 2023. It launched very incrementally, so the initial revenue build was adding $100,000 or $200,000 of revenue at a time, not millions at a time. For investors looking at it from a distance, it didn’t look all that game-changing.

What we learned through our research was that Verizon was very happy with it and was looking to expand it in a significant way, such that the ultimate scaling of that product could reach a couple hundred million dollars in annual recurring revenue. We believe that expansion actually occurred recently.

There was a significant expansion that we think happened. It’s important to note that this has not been press-released by Verizon or Allot. We’re going off our knowledge of the product and specifications and the marketing that Verizon is doing around it. We don’t have certainty on this, but it appears to us that Verizon has now expanded that deal.

We had similar revelations around Vodafone, which also recently expanded its deal and has publicly talked about that with Allot. I think the contrarian view is that this was always an exciting story. The execution was lacking for a time, the vision was overly ambitious, and the company was not risk-weighted enough in the way it was run.

Now that’s all changed. You have a company with a free-cash-flow-positive cost structure, and you’re coming off what was essentially a 10-year low in the DPI business, which we think is poised to rebound for several different reasons.

My view of this company is that, in a few years, it’s going to be a $200 million to $300 million topline company growing at a high rate with very high incremental margins. That clearly isn’t priced into the stock because, even after the move, it’s trading at around a $250 million enterprise value. That would be a 1-times multiple on a 25% to 30% grower with significant profitability. We know the market would value the company higher if our vision comes true.

Let me pause you there, because it’s funny: the questions I got most often were about the stock price, and I’m going to come back to those. People can look at the stock price. You and I scheduled this in December, when the stock was $3, and as we’re talking, the stock is around $7.50 to $8.

I think the most common question was, “Is this still interesting after the stock move?” The other question I got was, “I looked at this in 2015, and the stock was where it is today.” Let’s come back to all that.

My key fundamental question is this: I’ve looked at businesses like this in the past, and my big worry is that they have partnerships with Verizon and Vodafone, which is great. They’re providing security as a service, mainly for business customers. In the case of Verizon, I think it’s particularly on the fixed wireless access side. Correct me if I’m wrong.

My concern is that the value is in the distribution. Verizon has all the value, and every time they come back to Allot, they say, “We like your product a lot, but this is a buy-versus-build decision for us. We could build this internally and keep the 50 cents we’re giving you.”

I’m always looking at the buy-versus-build question. Then there’s the fact that, while you provide a great service, you’re not the only company in town. Verizon could go to someone else and say, “Allot is charging us 50 cents per customer per month. We’ll switch it all over to you if you charge 45 cents.”

There are switching costs and stickiness, but those are the 2 worries I have. I worry that all the economic value goes to Verizon and that eventually Allot gets squeezed down. I’ll pause there, because I could provide plenty of other examples. I’d love to hear your thoughts, because I think that’s the key fundamental question.

I think it’s one of them. One of the least fun jobs you could have, I would guess, is being a salesperson structuring a contract with a large Tier 1 like Verizon. They have professional procurement teams that are designed to beat up on vendors and run bake-offs constantly. That’s definitely part of the legacy of the space and some of the reticence people have when they look at investing in a company like Allot.

I’ll make a few points. There are companies with a lot of customer concentration on the operator side. A company that has actually performed really well that comes to mind is Harmonic, where they have about 70% to 80% revenue concentration as a predominantly network-infrastructure provider to Comcast and Charter. They’ve been able to extract reasonable terms on renewal with those partners, from what we can observe in the public financials.

It all comes down to value delivery: how much value is being delivered by the vendor, how commoditized the offering is, and ultimately how strategic it is to the operator. I think it cuts both ways. It’s very painful and takes many years to get in as a supplier to the core of Verizon’s network. This is something integrated into the core of the network, so it takes a long time to get there. It also takes a long time for someone else to come in and unseat you.

One of the magical elements of Allot’s positioning is that this is a very large TAM for a small-cap company like Allot—about a $5 billion TAM. It’s consumer and small business.

The Verizon product is primarily on the business side.

Taiwan Far EasTone, for example, has a very successful offering with Allot on the consumer side.

Vodafone currently offers it only to consumers. Telefónica has it for businesses. So it’s both business and consumer. The magic is that the TAM is big for a small-cap company, but it’s not so big that you’re bringing in a million different competitors and venture companies that are chasing you. There aren’t that many players out there.

Specifically, Allot is leveraging its incumbency and its knowledge of being a DPI provider—scanning traffic, classifying traffic, looking at metadata and patterns of anomalous usage, and providing that information back to the operators—but it’s doing that on a security basis. It’s scanning the traffic in the network, as opposed to what every other vendor in the space does when it goes to the telco and signs it up for a similar service: looking at DNS.

A DNS lookup is not as resilient or robust. It’s quite easy to evade in certain scenarios. It’s lighter-weight and easier to install, but it’s ultimately a more commodity-like offering. What Allot offers is much more robust.

On the Vodafone question, Vodafone essentially got a free launch when it first did the deal with Allot. Allot sold a lot of DPI to Vodafone and said, “Let’s do this security deal, and we’ll sell you a license for all your customers.” Vodafone said, “Okay, great. We’ll pay Allot $5 million”—I’m making up numbers here—“and we’ll get an all-you-can-eat license.”

Not 3 years later, Vodafone was on its earnings call talking about how this Secure Net offering, powered by Allot, was making $160 million in annual revenue. Allot had just sold away the farm to seed the market. It wasn’t capturing even a fraction of those economics.

Now, 10 years later, coming up on a big renewal with Vodafone—which happened last year—you can listen to the conference calls and look at the transcripts to see what happened. Allot expanded the Vodafone deal. It’s now offering more products to Vodafone, including home internet in addition to the mobile network. It’s getting expanded economics, and the companies are talking clearly about moving to a SECaaS deal from the perpetual license, as well as about growth.

Vodafone literally had 10 years to do something different, and it ended up coming back to where it began and upsizing with Allot. That doesn’t guarantee future success, but I think it can give you some comfort that what Allot is doing is more differentiated.

With Verizon, Verizon is really emphasizing what it calls cloud-based security offerings that are zero-touch and very easy to install. It’s leaning in, if you look at its website, around business internet security, which we know Allot powers, and business mobile internet security, which we think it recently expanded to.

This is a point of emphasis and pride for Verizon. We don’t think it has any plans to switch Allot out. Pricing is always a consideration, but you also have to think about the fact that the operator itself is making revenue from this. There was a TELUS transcript that talked about a 50%-plus attach rate when the product was offered to a customer. If Verizon is bringing in tens of millions or hundreds of millions of revenue, that’s a big win for some C-level people in the business group.

I did want to ask about that. If I’m the customer—say I’ve got a small business and Verizon is providing my internet and my cell phone service—Verizon comes to me and says, “Do you want our security service?” I know that, personally, whenever I sign up for broadband, the cable company always asks, “Do you want to get our home security?” And for me, it’s, “No, no, no, no, no.”

This is like getting a rental car and being asked whether you want the rental-car insurance. Most people say no because it’s covered by their credit card, and the rental-car company is making a lot of money on the insurance. Going back a long time, some younger listeners might not remember the AOL days, but AOL would always ask whether you wanted its home-security or malware service, and you’d always say no because it was probably a subpar product at an elevated price so the company could earn a margin.

Why does the customer sign up for this instead of getting something that fits their needs better, perhaps at a lower price, or just going without it? Anytime I’m offered an extra product by a big telco, I assume it’s at an inflated price and that the telco is going to make a lot of margin on it. AT&T sells you an iPhone and asks whether you want insurance on the iPhone. Why is the customer signing up for this versus doing it on their own or just going without it?

There are 2 different pitches around it. One is that the internet should be basically clean pipes. The telco should deliver pipes that are effectively clean of potential spam, ransomware, fraud, and all this different stuff. Clearly, that’s not the world we live in.

There is real value in accessing your internet connection and knowing that you’re not going to be bombarded with phishing attempts, accidentally click a link, download a Trojan onto your device, and give away your banking credentials. There are different levels of susceptibility depending on the user profile, but we’ve all known someone we thought was too smart or sophisticated to get phished, and then they did.

I think there’s real utility to it, and a price point of $2 per user per month isn’t particularly steep. You think about the security budgets of companies and the other solutions they might be looking at. The nice thing about the Allot solution is that there’s no ongoing maintenance or configuration needed. You don’t need to make sure you’re patched and up to date. It’s just running on Verizon. It’s not running on your end.

Let’s talk about what it’s actually catching. If I’m a small business and I sign up for this through Verizon, what is Allot catching? I initially thought it would just block a bad DNS request or malware. But if I get phished in my email and click on a link, how is Allot going to block that unless it’s blocking the email? What exactly is the service providing?

There’s a lot of command-and-control blocking going on, as well as scanning of the traffic itself. If someone is using a spoof on DNS, or some other technique to try to get around a blocklist, Allot is going to catch that where other vendors wouldn’t.

It can also scan for Trojans that you might be downloading onto your home network. If you have connected devices in your home—and a lot of people have a ton of connected devices at this point—it might be scanning to see whether there’s anomalous usage of a camera, such as a baby-monitoring camera in your child’s bedroom.

A lot of people don’t change the stock passwords on these connected devices, so they get hacked at a surprisingly high rate. Then they can get turned into DDoS-attack devices and botnets. It’s basically scanning the traffic and ensuring that what you’re engaging with is safe and secure.

My kid’s Nanit—you hit the nail on the head. I’m nearly positive I did not change the password on that. If it gets hacked, is Allot going to say, “This Nanit was using a megabyte of data per second because it was a video camera, and all of a sudden it’s using 5,000 megabytes”? Is Allot just going to shut that traffic down, shut the device down, or cut it off and send me an email saying, “Your Nanit was hacked”? Is that the game plan?

It would depend on the telco and its policy, but my guess is that it would just be shut off. Obviously, alerts and reports would be generated as well.

There’s good customization and configurability for people. Each of these services comes with a parental-control console. Again, it’s all cloud-delivered, with zero installation. You can set quiet hours, and there are other things you can use it for. But this is really the most robust form of parental control and cybersecurity. I think that’s one of the strongest use cases for consumers: the parental-control and family-protection elements.

On the business side, even if I pay for other products, given the potential disruption to my business if I get phished, this seems like a smart investment because it’s redundancy. This is something CISOs talk about: you need redundancy, and you can’t rely on having just 1 security product. You should have multiple layers.

This is Layer 1 of your security. Even though it’s technically Layer 7 because it looks inside the packet, it’s Layer 1 of your security because it’s before the traffic gets to you on the telco network. The vast majority of the traffic is going to be secure. If you have no budget for security, you can use nothing other than Allot’s product through Verizon. If you’re a bigger business, you’ll probably also pay for other services in addition to that.

Let’s go to the stock chart. The 2 questions I had were almost opposites. We started talking in December, when the stock was $3, and as we’re talking, last night’s close was between $7.50 and $8. I think the first question people will ask is, “Did I miss it?” What drove this massive run over the past 2 months?

I don’t think anyone has missed it at this point. A move like this is going to invite more volatility, so pullbacks should obviously be expected to some extent. But besides the fact that people knew you were doing a podcast on Allot—which they did not know—there was a period when many of these things were happening on the ground, but there was no public evidence of them yet.

A guy like me could go around saying, “I’ve heard Verizon is expanding the contract,” or, “They’re going to be profitable in a quarter,” but there’s definitely an element of people wanting to see results. They want to see performance.

Now you’ve seen that they brought in a new board and management team, did a major restructuring to address the past overspending and lack of P&L discipline, and reached a free-cash-flow-positive position. The company is at a trough revenue level in its DPI business, which we believe is coming off a low point with some real growth drivers, including the product refresh they just rolled out.

Then you have the SECaaS business, which has grown consistently at more than 50% recently. Its growth rate on both an ARR and in-period basis has accelerated. We think that revenue growth is going to continue to accelerate, and it’s going to come in at around $17 million this year, with $19 million of ARR, according to their guidance. That’s growing at 50% to 60%, and we think it’s on the cusp of some step-function moves higher in the early part of next year as they turn on these new contracts.

The market is reacting, especially after the last quarter, when they had their second quarter of positive cash-flow generation and reached profitability on both a non-GAAP and GAAP basis. I think that excited people and caused them to re-rate the business from where it was trading, at roughly a 1-times revenue multiple, to where it is now, around a 2.5-times trailing-revenue multiple.

But we think the trajectory of improvement is actually more rapid than the pace of the stock-price increase because the stock was coming off such a depressed valuation.

Let me ask the reverse of the question I just asked. In my younger, more eager days, I used to take notes on every company written up on Value Investors Club. My first notes on this company were from 2015, and my last notes were from 2022. It was written up 3 times there.

If you read all 3 write-ups, they all make a lot of sense and are quite bullish. They all say the step change is coming, and, to be frank, all 3 write-ups were wrong. I don’t mean to pick on anyone because I thought the write-ups were well done, but, with the benefit of hindsight, one from 2020 said the subscription business in 2024 was going to be $120 million. The numbers the company is disclosing now have 2 of those 3 numbers in them; it’s just missing the third.

A lot of people will look at the last 2 months and ask whether they missed it. Other people, including me, will look at the fact that over the past 10 years the stock is flat and say, “It’s dead money. It sounds great, but what’s different this time versus how it’s been pitched over the past 10 years?” In 2020, especially, it was described as being at an inflection point, but it never really happened. Why is this different?

There was a late-2023 write-up that you can read that referenced much of that history and what’s different now. The old team was using a TAM-based methodology: looking at a big TAM, saying they would capture a certain percentage of it, and expecting customers to ramp up very rapidly because Vodafone had done so.

They didn’t have enough data to know that the assumptions were wildly bullish, and they shouldn’t have proceeded the way they did. At the same time, we have to be fair to the old board and management team, because they did have the vision to expand into this segment. They expanded the deals with Vodafone and Verizon. The building blocks of that were put in place by the old team and board; the issue was that the pace of adoption was overly aggressive, with too much spending and overly ambitious expectations for the market.

What they’re doing now is a bottoms-up analysis. They’re looking at how many people are signing up with each carrier per month. We have it modeled out by each customer they have—how many monthly subscribers we think they’re adding. The numbers are triangulated.

The pond they’re playing in is still quite limited. Verizon’s business fixed-wireless-access group is 1.5 million subscribers. But if you vault into the 30 million subscribers on the business mobile side with the product Verizon appears to have launched recently, all of a sudden you’re multiplying the TAM you’re addressing at Verizon by 20 times.

With Vodafone, for example, Allot was delivering a valuable service; it just wasn’t getting paid. Now it’s getting paid on a SECaaS basis beginning this year, and that’s going to cause a step function.

You have to be pretty in the weeds to understand why it’s different. The cynicism is completely understandable after that long period of disappointment, but if you’re in the weeds, talking to the new management team, and looking at the numbers on a quarterly basis over the last few quarters, I think there’s a lot to feel encouraged about.

We feel there’s going to be very strong validation of the company over the course of 2025. We’re on the record, on your podcast and elsewhere, with that view.

Let’s quickly talk about the management team. They hired a new CEO in 2024. He was at Radcom, which is a big technology and telecom provider. I’d love your thoughts on the new CEO and the management team, because it strikes me that, as you mentioned, the old management team may have been out over its skis, or it may have been investing aggressively into a big growth opportunity while the telecom companies moved slowly. I’d love your thoughts on the new CEO, how he’s positioned the company, and how you think about him going forward.

I’m extremely excited about Alon Harari, the new CEO. He was formerly the CTO of Radcom and helped lead a refresh of its entire technology lineup. He repositioned the company for growth when it was going through some challenges. Through that, Radcom expanded deals with AT&T and Rakuten, 2 big carriers in the United States and Japan.

He was promoted to CEO. During his time as CEO, he led the company to double-digit revenue growth and doubled the profit margin, from around an 8% net-income margin to around 20%. About 8% of that was just interest income, because a lot of Israeli companies are conservative about keeping cash on the balance sheet.

I think Alon’s track record at Radcom is very impressive. The fact that he jumped to Allot also shows the type of opportunity he thinks exists at Allot. I think he would tell you that the opportunity at Allot is much more significant than it was at Radcom because of this cybersecurity-as-a-service solution, in addition to opportunities on the DPI side.

Alon comes across as very credible. He’s not someone who seems to be getting out over his skis when he communicates. He’s a technologist at heart, so he really understands technology, business development, and customer relationships.

He’s based in Tenafly, New Jersey, which is across the Hudson from New York City. Verizon’s headquarters are practically down the street from him in Basking Ridge, so I think that could come with some benefits. His relationship with AT&T—which was a 40% customer for Radcom, the last time I looked—could potentially lead to a deal for Allot.

I think there are some really good things in his background. He’s very strategic, and we think highly of him. Other shareholders seem to as well.

They also brought in a new CFO.

Yes, Liat Naim, who came from Amdocs and Taboola. We also think very highly of her. She’s based in Israel, and given that about two-thirds of the employees are there, it makes sense to have one of the C-suite executives there full-time. Alon is there a lot, of course.

She’s elevating the entire FP&A and financial organization. What I really like about both of them is that they’re young. They’re in their 40s, and they’re people who can lead a company for a long time. There are obviously great older executives as well, but I like looking at this company and thinking about the 10- or 15-year roadmap. These are people in the prime of their careers, entering the prime of their careers, with a long runway for shareholders.

I know I’ve been looking at too many small telecom distributors and partners because, when you mentioned Radcom, I thought, “That’s probably a $2 billion business.” Then I realized there’s no way a CEO would jump from a $2 billion company to this. I looked it up, and it’s actually a $200 million company, which is big by ordinary standards but small in this context.

You mentioned AT&T, and I’d be remiss if I didn’t ask 2 questions. First, is there a chance that AT&T would use the same SECaaS provider as Verizon? Do Allot’s products have examples of 2 national champions in the same country using them? Second, I assume AT&T has a SECaaS offering because I Googled it and found something that looked similar. Who is AT&T using for its SECaaS offering?

I do think AT&T could switch to Allot and use Allot. Verizon also had security offerings before it deployed Allot. It had app-based solutions and managed services from Cisco and others. Allot was a new vendor because Verizon liked what Allot brought to the table more than what the other companies offered.

In Spain, Telefónica and Vodafone both use Allot’s SECaaS products. The telecom world is big, and there are markets where Allot provides SECaaS to 2 leading players.

It’s a white-label product. There are things the carrier can do to differentiate its offering, and there’s an SDK that allows it to bring different things into the platform. It will never be the be-all and end-all for a telco to say that its entire cybersecurity footprint is run by Allot. If that were the case, it would be more challenging for Allot to have both AT&T and Verizon. But I think it’s realistic that Allot could win AT&T.

AT&T currently uses an app-based solution, similar to many other companies, and it has DNS-based solutions as well. But no one else has what Allot brings to the table in terms of true inline threat prevention, which is much more robust than a DNS-based solution.

The opportunity is big enough at Verizon and Vodafone alone that Allot could scale past $100 million of SECaaS revenue without winning AT&T.

That’s exactly what I was going to say. I’m domestic, so I know I can focus on the domestic market, but I was talking to another company that provides software to telecoms. I asked what would happen if they didn’t win AT&T or Verizon, and they said, “Those are the hardest customers to win. If we landed one, that would be great. But outside of them, there are 100 countries, with 4 telecom players in each.”

It would be great to land AT&T, but you could land 3 telecom players in 3 other countries. You mentioned that Allot recently launched in the Czech Republic.

They launched one in the Czech Republic recently, and they have some big wins in Asia-Pacific. They’ll probably get more there. There are many different markets.

I can’t remember how I introduced you. Did I say Outerbridge or Outerwall? Outerwall was what Redbox became, and then Redbox took that name when it renamed itself. I would be Outerwall, but Redbox took it, so it’s okay.

I’m looking at the 20-F, and I think there’s an updated 13G. According to the 20-F, Outerbridge has 7%, Clal Insurance has about 7%, and Lynrock Lake Master Fund owns 22%. That’s a large shareholding, although I have no idea who Lynrock Lake is. They have a board member there.

Aside from them, there isn’t really any other major shareholder representation on the board. Most of the directors don’t look particularly shareholder-oriented. I was also looking at the CEO’s compensation structure. Every investor loves the story where you give the CEO stock options at $5, $10, and $15, and if the stock gets to $15, they’ve created generational wealth.

I wanted to ask about the shareholder mindset at the company. You have 1 large shareholder on the board, which is great, but no other meaningful shareholders on the board. How do you think about the shareholder mindset there?

I think the executive mindset from Alon and Liat is that they’re building a large, highly profitable, recurring-revenue business over the long term.

We have tremendous appreciation for what the board has done recently at Allot. They’ve effectively turned over the vast majority of the board. Lynrock Lake is on the board, and they also brought on a new chairman we think is great, David Reis.

Before that, with our collaboration, they brought on a director named Rafi Kon, who was previously CEO of Radware and NDS, which was sold to Cisco for several billion dollars. They have some operationally and strategically savvy people on that board.

I can’t speak for Lynrock Lake’s long-term approach to the investment, but they’ve been around for a long time if you look back at the filings. Clearly, they’ve contributed as a director to the turnaround that’s happened here. They also have a convertible note that converts at $9.30.

The company has net cash, but it has a convertible note that’s around the money now. I think they have a lot of upside from the situation. If they feel the way we do—that this could be a $20, $30, $40, or $50 stock in a couple of years—I think they’ll want to play for that type of opportunity.

There are exit paths with technology and software companies. There’s always interest, especially for a company firing on all cylinders. But I think they’re still at least a year away from proving that out. I don’t think they want to sell anywhere below a certain level, and I don’t think they’re looking to sell the company imminently. Put it that way. I do think people would love to buy it at these levels.

I want to quickly address the legacy business. You can tell me your valuation, and I will ask you about that, but let’s talk about valuation without jumping into specific numbers. I’m not going to share a spreadsheet, but when you think about the value here, how much do you attribute to the legacy business, and how much do you attribute to SECaaS? If you want to combine the 2 and say, “Here’s roughly what we think the company is worth,” that would be helpful for my next question.

That’s why I was going to ask about the legacy business, because I love that piece of the story.

I think about it as a $200 million to $300 million topline company in a few years, on a consolidated basis, with a 25% growth rate and very high profit margins.

I think the business could trade at a 6- or 7-times revenue multiple. If you look at companies like Fortinet and A10 Networks, those are good examples of companies that trade at several times revenue—up to 10 times revenue. The more security-based the business is and the higher the growth rate, the higher the multiple will be. The more recurring the revenue is, the higher the multiple will be as well.

If Allot has a $40 million or $50 million SECaaS line in a few years and another $125 million of revenue from the other business, you can argue about how to blend it. But if Fortinet gets 10 times revenue and A10 gets 3 or 4 times revenue, and Allot is growing at the top end of that group, I think a 6- or 7-times revenue multiple is reasonable.

There will be real profit and free cash flow behind that as well. A P/E-based valuation would also be a reasonable way to look at it, perhaps a 20- to 30-times multiple, depending on where profitability shakes out.

I have a hard stop at 2:55, so this might have to be the last question. I wanted to talk about the legacy business because I love that part of the story, and there’s an interesting catalyst there.

The legacy business had several competitors. Its largest competitor was owned by private equity. Can you quickly address that side? I think it’s important because when I say “legacy business,” you might say it’s all going away, but I think there’s an interesting catalyst there.

The market had consolidated down to a duopoly in DPI. Sandvine found itself on the U.S. sanctions list because of sales it made in problematic geographies, including helping governments spy on their citizens and conduct censorship—things the U.S. government did not like.

Sandvine has gone bankrupt and is in a stalking-horse sales process to sell off the pieces of the business. It has said it’s going to exit 50% of the geographies in which it operates, or cede 50% of its revenue. It has also laid off 40% of its staff.

If you’re a Sandvine customer, you have to be looking for alternatives right now. Allot is going to stand out as the strongest alternative. This is a slow sales-cycle business. It may take months or quarters to win a deal, and then it may take quarters after that to ramp. The issue has been around for the last 6 months, but it hasn’t shown up in the P&L yet.

We think real deal flow is going to start coming through and allow that business to return to growth. Allot also refreshed its DPI product lineup with the Allot Service Gateway Tera III, which is significantly more capable and essentially triples the specifications of the product.

As we discussed earlier, this business was cyclical. You could go through 5 years with no growth, then refresh the product and suddenly see some growth. Now you have a product refresh coinciding with the biggest competitor going bankrupt and exiting many of its markets.

That’s a wonderful setup for Allot. It probably won’t produce hockey-stick revenue growth because of the sales cycles, but it’s going to be positive for how the deals get priced and structured: less pricing pressure, more opportunity, and more deals in the sales funnel. Those are the types of problems that are good to have, as opposed to what they’ve been dealing with historically.

I think you’re absolutely spot-on. There was a cheeky little answer at the end of the Q3 call when somebody asked what the company was seeing on the non-SECaaS side. They said it was a “benign competitive environment.”

If you’re AT&T or Verizon and Sandvine was a key supplier for some reason, and then Sandvine goes bankrupt because it was put on a sanctions list, you have to imagine those are huge businesses that don’t want to touch that. I’d have to imagine that creates a lot of opportunity. If you were starting to win that business, it might pop up the next day. Here, it might not show up for 18 months, but if you were a salesperson, you’d have to imagine there’s going to be a lot of deal awards.

Imagine being a CIO or CTO and going to your board at year-end, when these decisions get made, and saying, “We have this vendor. It’s bankrupt, but I think it’s going to get purchased by a stalking-horse buyer.” I think there are going to be a lot of deal awards, and, as you said, revenue may lag that. But Allot should at least be able to talk about some progress on that front over the next couple of months.

This has been great. Rory is joining from Hawaii. Are you still in Hawaii right now?

Yes, I am.

We have early-morning Hawaii Rory. Rory and I have chatted before about a separate name that, at some point, we might have to do a podcast on. We both love that company, so we may do that down the road.

You’re a phenomenal interviewer. You do a ton of preparation, and I love listening to your podcast. Keep it going. I appreciate it.

Rory, this has been great. Thank you so much for coming on. I’m looking forward to the second one. All right, take care, Andrew.

A quick disclaimer: nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during the podcast. Please do your own work and consult a financial adviser.