Allot Communications ( Nasdaq - ALLT ) -- Secondary Pulled but Overhang Persists

Allot Communications (ALLT $12.50) reported excellent on target Q2 results.  Fully taxed earnings rose 200% to $.09 a share.  Revenues climbed 35% to $18.5 million.  Incoming orders exceed shipments for the tenth straight quarter.  Europe accounted for 52% of sales; Asia, 26%; and North America, 22%.  Allot signed up five more large carriers for its deep packet inspection systems, including its first major Russian customer.  Valued added services, like video caching, accounted for 10% of bookings.  Prices on the company's core hardware products have been and are likely to continue dropping.  Allot is trying to keep average selling prices afloat by adding additional software features.  That effort appears to be working.

Allot announced plans to raise capital in a public stock offering.  Insiders were queued up to sell a large number of shares in the deal, as well.  Those investors didn't participate in the company's original IPO.  This would have been their first opportunity to cash in on the shares' appreciation.  The recent upheaval in the markets caused the deal to be scotched.  Upside performance probably will be limited for the time being because of the overhang.

Meantime, business remains strong.  The proliferation of high performance mobile phones and bandwidth intensive applications promise to sustain demand at superior levels well into the decade.  Emerging economies are likely to amplify performance.  The introduction of additional value added software could yield further leverage.  We estimate 2012 income (fully taxed) will improve 29% to $.45 a share even if the U.S. and European economies stall out.  Gains of 25%-35% annually appear achievable in subsequent years.  Resolution of the "net neutrality" issue in the U.S. could provide a major leap forward.  Even a compromise solution which gives carriers some pricing discretion could provide a significant boost.

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