If Allot Is Doing So Well, Why Is Its Stock Price Doing So Badly?

Shares have fallen 32% in half a year even though the company is a market leader in helping mobile providers optimize bandwidth.

Dror Raich
Yoram Gabison
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Dror Raich
Yoram Gabison

Explosive is the term analysts use to describe the dizzying growth of the information superhighway on telecom networks. Over the next four years, demand for bandwidth is expected to grow by 80% annually.

For companies operating in the cutthroat competitive environment of the cellular market, this means they need to invest more heavily in infrastructure while also coping with shrinking profit margins. Thus optimal use of existing bandwidth, by distinguishing between the requirements of different applications and employing precise methods for pricing services, is an absolute must for minimizing investment in infrastructure and guaranteeing maximum returns.

Allot Communications has developed a Deep Packet Inspection technology that enables companies to analyze the types of information carried by networks, block threats such as viruses and offer differentiated service packages to optimize their allocation of resources.

The company's stock price reflected the market's enthusiasm for its growth potential, outperforming the Nasdaq index by 93% - until six months ago, when it suddenly reversed direction. It is now 32% below its peak.

In an interview with TheMarker, CEO Rami Hadar spoke about the company's prospects.

'At a crossroads'

Allot appears to be at a crossroads. With $540 million in market value, and having bought out two companies in the last half year, it could present a takeover target itself. Where do you go from here?

Allot is indeed at a crossroads. Allot possesses elements of a start-up, but on the other hand, it is well-financed and stable. Allot has been around for 15 years, which isn't trivial in Israeli high-tech.

I think there are plenty of advantages in being a mid-sized company, but this isn't a stable position to occupy in the telecom world. Each day we need to ask ourselves how to penetrate new fields and expand.

Why isn't it stable?

Because the communications market is dynamic. Start-ups are trying to enter the arena, while large companies view it as an increasingly legitimate field to expand into. So we constantly need to look toward growth, provide our clients with more comprehensive solutions, and enter new marketing and technological niches.

The issue of size is very pertinent to us. For Allot, operating in the global communications market, working from Israel has one advantage - the technological foundation. But all other aspects pose a challenge. We don't have a local market. A competing American company has a market that provides 40% of its sales before they even need to board a plane.

What would enable you to continue expanding and not lose market share?

I'm worried less about development, because Israel has the best engineers, in terms of both professional level and efficiency. The main challenge facing Israeli companies is always sales. We just concluded an episode that wasn't exactly helpful.

Part of the slump in shares occurred during Operation Pillar of Defense [in Gaza last month], especially when a missile fell near Jerusalem, whereupon we began receiving phone calls from clients. But I don't think the operation affected business, because it ended quite quickly. I know that during Operation Cast Lead [a 2009 operation in Gaza], there were clients who canceled orders.

Over the past few years, Allot has increasingly made inroads with large customers. Last quarter, we announced that we'd won a tender by a top-tier U.S. cellular company, and two of the four largest cellular companies are our clients. This is due to Allot's long-term strategy of reaching out to such customers directly, rather than through contracts with large equipment manufacturers like Alcatel-Lucent.

The ability to provide quick turnaround for service delivery as well as tailor-made solutions distinguishes us from larger companies and enables us to reach out to the communications giants. This is much easier for a medium-sized company to do than a large company.

A sign rests on the top of Allot Communications Ltd's headquarters in Hod Hasharon, Israel.Credit: Bloomberg
Rami Hadar: Making inroads with large customers.Credit: David Garb