Allot Communications
17 May '11
The likely evolution of how you've used mobile telephony is as follows: pre-1998, voice calls only. '98 to '00, voice and tiny amounts of data in the form of text messaging. '00 to '06 increased data usage in the form of higher text volumes and occasional internet surfing on your phone. Between '06 to '09 you may have used a mobile broadband modem for your laptop, or a Blackberry for mobile email, upping the amount of mobile data consumed. Finally, in recent times you may have joined the smartphone revolution. Throw an iPad or equivalent and you can see an emerging trend where voice (phone calls) is secondary to mobile internet.
As it happens, it's likely that in the foreseeable future voice calls will be free in mature markets, implying revenue streams for telephony providers will come from mobile data (meaning video, email, surfing, etc).
This was brought home to me recently when I saw a graph of network usage for the entire iPhone handset pool on a UK mobile network. On average, data usage immediately rose 20 fold when users moved to the iPhone from older ordinary devices. Smartphones no longer simply imply voice and text; at the heart of mobile telephony today lies Facebook + Twitter + YouTube + email + apps + IM and so on. Whatever mobile networks can build, handsets are ready to consume.
So what is absolutely critical to mobile networks going forward is managing the network capacity that has been built at massive cost. Like English mustard, the profit in data lies not in what people consume, but rather what's washed off the plate and down the sink. For example, if a provider charges $40 for 20G/month and a consumer uses all 20G, then they're quite likely unprofitable customers. If they use 3G/month they're great customers! They pay for more than they need.
To extend the example, a network could raise a customer's bundle from 20G/month to 30G, increase the monthly charge from $40 to $45, however throttle them to lower speeds when they hit, say, a 15G limit: one of several simple traffic management techniques. "Traffic shaping" will be one of the most important things for telephony providers to perfect in the years ahead, both in fixed and mobile.
Company: Allot Communications (Nasdaq: ALLT)
Country of incorporation: Israel
Market Cap: $325M
Cash / Debt: $61M / $0
Insider Ownership: 3.6%
www.allot.com
Only yesterday Allot reported that total revenues for the first quarter of 2011 reached $17.2 million, a 38% increase from the $12.5 million of revenues reported for the first quarter of 2010, and a 6% increase from the $16.2 million of revenues reported for the fourth quarter of 2010. Net profit for the first quarter of 2011 was $1.6 million, or $0.07 per basic share comparing with a net loss of $0.4 million, or $0.02 per share in the first quarter of 2010, and net income of $1.3 million, or $0.06 per basic share and $0.05 per diluted share, in the fourth quarter of 2010.
I suspect that this is very much the thin end of the wedge. When I look at Allot's entire product range it's clear that they have covered off the most important things data networks will need to implement in the future. Allot's DPI (Deep Packet Inspection) technology enables mobile service providers to identify, classify, prioritise, and shape traffic, ultimately resulting in enhanced performance and profitability. New competitors will always emerge, but for now these guys are in a great position.
