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Packet inspection/traffic management

Allot's All Alone in Forecast

Competitors of Allot Ltd. (Nasdaq: ALLT) say they're not feeling the same pain as the deep packet inspection (DPI) vendor is.

Yesterday, Allot lowered an earnings forecast for the second time this year, saying it expected full-year revenues between $32 million and $35 million. That was below analyst expectations of $38.4 million in sales and sent shares plummeting. Allot was down 59 cents (8.8%) to $6.15 by late today. (See Allot Shares Sink on Forecast, Allot Edits Outlook, and Allot Alters Estimate.)

But while Allot was forced to lower its expectations, competitors in DPI say they haven't seen any third-quarter weakness, and most claim that any pain in the market has been strictly isolated to Allot.

Ellacoya Networks Inc. CEO Jerry Wesel, for instance, says the September quarter was a record-breaker for his company. "Our business has never been stronger. We're doubling our revenues from last year to this year and we expect them to double again in 2008."

Sandvine Inc. was equally bullish on its results for last quarter. Unlike Allot, Sandvine recently revised its earnings guidance upward, from a range of $62 million to $67 million to between $70 million and $75 million for its fiscal year 2007. (See Allot Shares Sink on Forecast.)

Allot cited slow sales during the quarter and delays in customer purchase decisions due to its newly announced 10-Gbit/s Service Gateway product, which it says is in trials with customers now. (See Allot Announces DPI Platform.)

Competitors question Allot's explanation, though. "In my experience, customers seldom wait for a product to come to market before making a buying decision. They look at what's available and go with that," says Tom Donnelly, EVP of sales and marketing at Sandvine.

But analysts say third-quarter weakness could also be a result of longer-than-expected sales cycles associated with selling to Tier 1 service providers.

"It seems like Tier 1s are taking longer to nail down," says CIBC World Markets analyst Ittai Kidron. He believes that's because DPI "has yet to be proven to be a high priority in Tier 1 telco networks."

Despite Allot's troubles in 2007, Lehman Brothers analyst Inder Singh believes the company could pose a turnaround in 2008. In a research note issued this morning, he writes, "[We] remain encouraged by a '08 uptake of DPI gear by Telcos. Overall, we believe the DPI market will ramp in 2H08 and into 2009."

Kidron believes the battle for DPI market share is far from over, as Allot, Ellacoya, Sandvine, and Cisco Systems Inc. (Nasdaq: CSCO)'s P-Cube will all be involved in telco bids. "It all comes down to trial activity. Until the Tier 1s have made up their minds, I can't really say that one is better than another," he says.

— Ryan Lawler, Reporter, Light Reading

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