Allot Ltd. (NASDAQ:ALLT) faced difficulty in the fourth quarter due to launch delays, macro issues, and friction in selling its SECaaS solution to CSPs. While Allot hopes to attain full-year profitability by 2024, the route to profitability appears difficult in light of the company’s continued capital loss. Notwithstanding the fact that the company is trading in deep value territory, with 47% of its market cap in net cash, I am staying away for the time being until macro-headwinds subside.

Earnings Forecast for the Fourth Quarter

ALLT’s sales fell 19% year on year in the fourth quarter of 2022, hitting $33 million, which was in line with expectations but somewhat lower than predicted. The management blamed the decline on worsening macroeconomic conditions. The company’s core DPI business is encountering macro headwinds, which are generating longer sales cycles and lower close rates, resulting in a 37% year-on-year revenue guidance decrease for 1Q23. As a result, ALLT now expects a 5%-10% decline in the DPI business for CY23, as opposed to the former growth prediction. However, the company anticipates growth to pick up in the second part of the year as it secures new CSP contracts and ramps up existing ones. The conventional DPI business is likely to diminish, while the SECaaS business is predicted to accelerate ARR growth. To quickly ramp up its GTM and achieve profitability in CY24, the company is focused on strategic clients and operators. It has canceled six contracts and has stopped reporting MAR in order to focus on short-term revenue opportunities rather than long-term market share.

While I feel ALLT is still inexpensive based on its current multiple, the company needs to focus on developing its business because it is currently losing money. Despite facing substantial macro issues, the company has ample time to create its Security division, which is a demanding but feasible undertaking. Unfortunately, Allot’s recent financial results and prognosis have been dismal, with a 19% year-on-year fall in revenue and a below-consensus projection for 2023. The company encountered hurdles in the fourth quarter due to launch delays, macro issues, and friction in marketing its SECaaS solution to CSPs.

Shekel Depreciation would bring assistance to OPEX in the near-term

Most of Allot’s sales are in US dollars, but its customers’ budgets are in local currencies, which limits their purchasing power to buy Allot’s products. Moreover, the Security business is conducted in local currencies at the Service Provider customer level, resulting in reduced SECaaS revenue when converted to USD. It should be noted that SECaaS revenue is exclusively derived from international sources.

Yet, because the majority of Allot’s expenses are in Shekels, the Shekel’s depreciation is expected to give cost relief. Allot had previously hedged its CY22 expenses, limiting the impact of the Shekel’s drop. As the hedges mature, Allot may see a reduction in operational expenses in addition to cost-cutting efforts. Since November, Allot has been hedging its CY23 expenses, and Shekel’s value has continued to fall.

Macroeconomic headwinds will continue to weigh on growth.

Allot is in a difficult position as it tries to reconcile the expansion of its Security as a Service business with the requirement to sustain its core business and decrease cash burn. The organization operates in a poor macroeconomic climate in which Service Providers are wary of taking risks and are reducing their budgets. While Allot attempts to focus on the Security industry, it must retain its core business in order to maintain revenues. In CY23, the business expects to burn $15-$20 million in cash, although it is taking initiatives to decrease costs and has a view to larger traditional purchases as 5G upgrades require upgrades.

Allot’s management believes that by utilizing its DPI technology in 5G security applications and providing security as a service across service provider networks, they may expand. Unfortunately, due to severe economic conditions, the deployment with service providers that have already signed up has slowed down, as well as the acquisition of new clients. To respond, Allot has switched its focus to top-tier service providers while decreasing investment in lesser ones, resulting in a smaller deal pipeline. Despite this, there have been occasional triumphs, such as the successful launch of Far EasTone, which saw a high adoption rate thanks to an aggressive go-to-market push. Although skeptical about the rise of security wins, the FET agreement demonstrates that there is still a possibility for future launches, even in the current macro context.

Valuation

Allot is progressively converting into a Security as a Service firm, which I feel has more value than its core business while accounting for a small portion of revenues at the moment. The traditional business has been progressing well until recently, but due to macro conditions and tighter Capex conditions, I predict a fall in sales in the near term. With 47% of the market cap in net cash, the company is selling at a considerable discount to its historical multiple. Allot is trading at $2.6 per share, with net cash of $1.25 per share.

Last Thoughts

Macroeconomic headwinds have weighed on the company, resulting in a 37% YoY revenue guidance decrease for 1Q23. The company predicts a 5%-10% reduction in the DPI business for CY23, with a comeback in growth in the second half of the year. Allot operates in a fragile macro environment in which Service Providers are wary of taking risks. Notwithstanding the fact that Allot is trading at a considerable discount to its historical multiple, with 47% of market cap in net cash, I remain concerned owing to macro headwinds and rate the company a Hold.

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