Telecom-Driven SECaaS Expansion Will Unlock Recurring Market Opportunities

Key Takeaways

• Strong growth in security services and major telecom partnerships are driving higher recurring revenue and earnings stability, positioning Allot for continued expansion.
  
• Shift toward software and recurring revenue is improving margins, while rising global data traffic sustains demand for Allot's network intelligence and security solutions.
  
• Heavy customer concentration, long sales cycles, and shifting market dynamics threaten Allot's revenue stability, growth prospects, and ability to transition to recurring cloud-based service models.

Catalysts

Develops, sells, and markets network intelligence and security solutions in Israel, Europe, Asia, Oceania, the Americas, the Middle East, and Africa.

• Rapid expansion of Allot's Security-as-a-Service (SECaaS) revenue, evidenced by a 73% YoY increase in ARR and strong initial contribution from major telecom partners like Verizon and Vodafone, signals the company is effectively capturing the global surge in demand for bundled, carrier-grade cybersecurity services-supporting future revenue growth and greater earnings visibility as more subscribers migrate to bundled services.
  
• Major new customer wins, such as the landmark multi-year, multimillion-dollar contract with a Tier 1 EMEA telco-delivering both network intelligence and cybersecurity across converged fixed and 4G/5G mobile networks using Allot's SG-Tera III platform-open sizable new addressable markets and add high-quality, long-term recurring revenue, impacting top-line revenue growth and deferred revenue.
  
• SECaaS solutions are showing very high attach rates (in the 90%+ range) with business customers as telcos roll out default "opt-out" security offerings, leveraging long-term increases in cyber threat awareness and regulatory pressure for end-user security-this structural trend is likely to sustain elevated net margin and ARR expansion as market penetration deepens.
  
• Shift to a higher-margin, recurring-revenue product mix (SECaaS and software expansion deals now comprising a larger share of revenue) is directly driving gross margin improvement (now in the 71–73% range), with the expectation this will persist as more software-based contracts are landed and legacy hardware and services shrink in mix.
  
• Persistent global data traffic growth, spurred by increasing connectivity, 5G/IoT adoption, and cloud migration, is fueling service provider investment in advanced traffic management and security analytics, directly benefiting Allot's differentiated, inline network visibility and control solutions; this supports a strong pipeline of future large deals and underpins expectations for multi-year revenue and operating profit growth.

Allot Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Allot's revenue will grow by 14.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.1% today to 10.5% in 3 years time.
• Analysts expect earnings to reach $15.0 million (and earnings per share of $0.18) by about August 2028, up from $-2.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 68.0x on those 2028 earnings, up from -181.8x today. This future PE is greater than the current PE for the US Software industry at 35.0x.
• Analysts expect the number of shares outstanding to grow by 2.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.71%, as per the Simply Wall St company report.

Allot Future Earnings Per Share Growth

Risks

• Heavy reliance on a small number of major customers-most notably Verizon and Vodafone-for a significant portion of SECaaS recurring revenue exposes Allot to contract concentration risk; the loss or slower-than-expected ramp of these contracts could cause material volatility in revenue and earnings.
  
• Landmark deals, such as the tens-of-millions CapEx contract with a Tier 1 EMEA telco, are subject to very long (12–24+ month) sales cycles and multi-year execution timelines, increasing risk of project delays, customer deferrals, or non-renewal; this decreases revenue visibility and predictability in out-years.
  
• Shifting product mix between one-time CapEx deals (like Smart/Tera III) and growing recurring SECaaS revenues creates ongoing volatility and dependency on continued successful transition to SaaS/cloud models; any struggles or setbacks in this transition could hurt top-line growth, gross margins, and operating profitability.
  
• Allot's partners (telcos) retain full control over customer migration to new plans (such as Verizon's My Biz Plan) and associated go-to-market investment, limiting Allot's ability to accelerate penetration among end users; slower migration or strategic deprioritization by the telcos could significantly constrain revenue growth.
  
• Industry trends toward hyperscale cloud providers, integrated security offerings from major infrastructure players, and increasing end-to-end encryption could reduce demand for deep packet inspection and network-based security services; this threatens Allot's total addressable market, long-term revenue trajectory, and margin potential.

Valuation

• The analysts have a consensus price target of $15.0 for Allot based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $142.3 million, earnings will come to $15.0 million, and it would be trading on a PE ratio of 68.0x, assuming you use a discount rate of 10.7%.
  
• Given the current share price of $7.79, the analyst price target of $15.0 is 48.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.