Description

Thesis punchline

ALLT is a sleepy networking / security company that generates ~$100M of revenue has nearly $100M of cash and trades at just north of $300M market cap. 

• ALLT has quietly built a subscription business that can very well be north of $100M of incremental revenue in a few years from $0 in 2019
• There is uniquely high visibility that this new revenue stream will ramp based on historical cohort data
• Importantly, ALLT has already won deals in 2019 that have not yet shown up in revenue due to implementation cycles - they will start recognizing revenues starting in 2020 
• Market has overlooked a recent win with Altice Portugal that is further validation of this strategy
• The market is massive - for sense of scale, if ALLT simply wins all the RFPs that are out in the market today and scales them based on historical cohort curves, this would be a $150M revenue stream.
• ALLT’s core business has a free option to accelerate on 5G deployments
• Relatively conservative operating assumptions can paint a triple in 5 years while any acceleration in the subscription business will drive a much higher bull case
• $3 in cash per share, NOLs, core business, subscription business won but not recognized provide downside protection in a bear case

Quick Company History 

ALLT’s history is in the deep packet inspection (DPI) market. Their technology allows companies to analyze each packet of data coming through the pipes. The core use case was with telcos who needed a way to manage the network on a very granular level (eg throttle data-intensive youtube traffic and let emails through). A customer would buy a box, connect them to the edge of the network, and each box could analyze a set amount of traffic. Over time, the value prop decreased as privacy regulations put a limit on telco’s ability to dig deep into customer’s data and thus the need for a gold standard DPI box, hardware boxes were replaced with virtual appliances, and networks were built out. The stock went from $35 -> $5 from 2012 to 2015 as this negative cycle played out. 

In 2016, ALLT appointed a new management team who has since stabilized the ship. They have grown the company’s topline at double digits in the last two years by taking share from competitors in the DPI market as well as investing in new use cases. Importantly, ALLT realized that the networking value proposition may have decreased but the granular packet data could be very useful in a security context. Security use cases have now grown to about 30% of the business. 

In 2017, ALLT launched security with their anchor customer Vodafone. Vodafone upsells their end customers a security endpoint solution for their mobile customers for an incremental 1EUR / month. The uptake has been remarkable with some markets seeing 50%+ penetration. This has been a great way for Vodafone to increase ARPU and stickiness and has ramped to over 20M users for them across 10 countries in 3 years.

The Security Subscription Opportunity

As the first customer, the Vodafone deal was structured as a perpetual license / maintenance deal. The adoption here across the world has been an incredible datapoint on product market fit for the security solution that ALLT decided to go to market under a subscription model in 2019. From a unit economics perspective, a subscription customer would take no risk as ALLT would fully build out the backend. They can charge their end customer something similar to the 1EUR / month that Vodafone charged. ALLT and the customer will split this revenue stream roughly 50/50. This is a win / win as for the telco, it is a risk free way to boost ARPU. For ALLT, this revenue stream will likely come in at similar gross margins but very high incremental EBITDA margins. 

What has given ALLT the confidence to run hard at the opportunity has been the historical cohort curves seen in the Vodafone case study. They now have a good sense of the best markets to go after, the ramp rates of various markets, and best in class practices for rollout (see Vodafone data below). 

In 2019, ALLT introduced a new KPI called MAR. This represents the maximum annual revenue ALLT will recognize if the end customer adoption is 100%. Over the last 12 months, ALLT has sold roughly $100M of MAR - this has not yet translated to revenue but will as the customers get implemented. 

Below is a base case of what could happen with subscription revenues over time. 

Key assumptions:

• Annual MAR Signed - I just assume the same rate of $100M a year going forward in the base case.
• Cohort curves - based on Vodafone cohort curves
• EBITDA - 40% incremental margins. 

A couple points to give context here and frame the mental model.  

First, $100M MAR roughly translates to 16M potential postpaid customers added per year assuming $1/month to end customer and a 50/50 rev share. Assuming 30% cohort penetration, ALLT will need to win just $300M MAR, 50M potential customers, and get 16M end customer adoption to achieve $100M in subscription revenues. 

This seems eminently doable given the following:

• If Vodafone was sold under this model - we would already be there. They already have 20M consumers on the platform on roughly 60M of post-paid customers
• ALLT has already achieved $100M MAR in the first year of sales in 2019
• Our work suggests just adding up the RFPs in the market today can account for $500M of MAR - we expect many more RFPs over time as this security solution becomes more mainstream
• Last week, ALLT announced that they won Altice Portugal as a subscription customer. This is a $20M MAR win. Ramping just the rest of Altice Europe would be $120M in MAR.   

  

Networking Comments

The crux of the thesis is on the subscription side as this is what I expect to drive the stock over the next 24 months. It is worth noting however that you are also getting a free option on 5G adoption here. As mentioned in the opening, the traditional networking use case has become fairly commoditized. With the rollout of 5G, the data throughput will 20x and there will be a need for a more sophisticated DPI solution once again as these networks get built out. It is hard to know when this will manifest itself in revenues but over 5 years, it is a good bet that 5G infrastructure will be developed and ALLT will get their fair share within this build-out. 

Valuation / Model

Conservative operating assumptions can paint a triple fairly easily. The below model underwrites no 5G bump on the networking side and winning $100M of MAR a year on the subscription side. The MAR and multiple associated with the subscription biz may prove conservative for the reasons discussed above. 

Catalyst

• More subscription wins
• Q4 earnings and FY guide - should give updated MAR disclosure incorporating Portugal win and guide 2020 higher
• Beats vs consensus
• Reaching profitability in 2020