Yet Another Value Podcast - Outerbridge Capital's Rory Wallace on Allot's rebound and how to value Verizon partnership $ALLT

Episode Date: January 22, 2025

Rory Wallace, Chief Investment Officer at Outerbridge Capital, joins the podcast to discuss his thesis on Allot Ltd. (NASDAQ: ALLT), a leading global provider of innovative network intelligence and security solutions for service providers and enterprises worldwide. For more information about Rory Wallace and Outbridge Capital, please visit: https://www.outerbridgecapital.com/ Chapters: [0:00] Introduction + Episode sponsor: Fintool [2:06] What is Allot $ALLT and why is it so interesting to Rory [7:22] What is Rory seeing with $ALLT thesis that that the market is missing [12:11] Fundamental question RE: vendors and vendor stickiness with Verizon partnership [20:51] Why are customers signing up for Verizon security service vs. something else [27:34] What drove $ALLT run in stock price in last couple months [30:44] What is different this time with the $ALLT pitch vs. past write-ups on VIC [34:55] Management [39:10] Is there a chance that AT&T would use the same CCAS provider as Verizon (Allot) [43:36] Shareholder mindset of the company [46:07] $ALLT valuation [48:22] Competitive landscape Today's sponsor: Fintool Fintool is ChatGPT for SEC Filings and earnings calls. Are you still doing keyword searches and going to the individual filing and using control F? That’s the old way of doing things before AI. With Fintool, you can ask any question and it’s going to automatically generate the best answer. So they may pull from a portion of an earnings call, or a 10k, whatever it may be and then answer your question. The best part- every portion of the answer is cited with the source document. Now- if you’ve tried to do any of this in ChatGPT you may know that the answers are often wrong or hallucinations. The way Fintool is able to outperform ChatGPT is their focus on the SEC filings. If you’re an analyst or a portfolio manager at a hedge fund, check them out at https://fintool.com?utm_source=substack&utm_campaign=yavb&utm_content=podcast280

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That's fintool.com. all right hello and welcome to the yet another value podcast if you like this podcast would mean a lot if you could rate subscribe review wherever you're watching or listening to it with me today i'm happy to have on my friend the cio o of our wall rory wallis rory how's it going going well andrew how are you doing great uh look thanks for coming on i'm super excited about the podcast the company we're going to talk about today but let me start this podcast the way i do every podcast a quick disclaimer remind everyone nothing on this podcast is investing advice that's always true but this is an internationally domiciled company they trade locally

they're on the smaller side and both of those carry extra risk so everybody should just remember not a financial advice consults financial advisor do your own work all that sort of stuff and i worry the company we are going to talk about today is a lot the ticker there is a l-l-t i was telling you before i'm super excited to talk about because as i was doing my work i was like i can ask questions about like is this a 10-bagger or i can ask questions is this dead money for the next 10 years So I'll pause there. Toss it over to you. What is a lot and why are they so interesting?

So very, very well set up there, Andrew. I think it's been quite a journey at a lot. And you can see that as evidenced by the stock price, which as you mentioned, it was worse than dead money for the better part of the last 10 years. It was pretty much in a downtrend. And it's recently had a significant re-rating, although the company is still only valued around $250 million today. playing in a TAM that we think is valued probably around $10 billion when you aggregate the different

markets they're serving. So still a lot of opportunity, but a lot to talk about. I would say at a high level, a lot is a niche networking technology solutions provider to telecom operators. So company that came up in embedding itself in the core of tier one carrier networks providing deep packet inspection equipment, which essentially is used to scan traffic that goes through the network and then apply policy on that traffic. So, for example, there was services like Napster and Limewire that were very popular back when you and I were a little bit younger. And so Sandvine, actually a topical company that we'll speak about today, they were a provider to Comcast, and Comcast used them to shut down certain power users of Napster and Lime. basically to allow the network to have more resources.

And there were a whole bunch of things that came out of that at the time. It's very powerful technology, as you can imagine, scanning every packet that goes through the network, being able to discriminate is this Facebook, Twitter, a video game on an application level, and then providing that reporting back to the carrier and applying policies such as shutting off the user in certain cases or charging different rates for different users.

So very, very powerful, but very niche. This was a technology that had, you know, throughout most of the last 20 years, it was about a $500 million tam for a handful of vendors to participate in. And the reason that it didn't really broaden out is this is sort of a Ferrari-type product. And for a lot of operators, sure, they'll deploy DPI, but they're not going to grow that deployment necessarily every year. It's doing for them what they want it to do. they'll refresh it when there's when there's a new product cycle but there wasn't a lot of growth and so

initially valuations for these dPI companies had been priced for long-term sustained growth call it five six times revenue multiples and then what happened was especially coming out of an up cycle in the 2010 time frame there was just a stagnation in the market and you saw sandvine pro sarah and a lot the three publicly traded dPI companies at that point all enter downturns in their stock prices, ultimately ProCera and Sandvine merged under the ownership of Francisco partners, and a lot was left as the sort of last man standing. Now, the reason why I think it's so interesting right now is in addition to that deep packet inspection business, which we think is actually starting to develop some real tailwinds going

into the next several years. But in addition to that business, a lot took itself and that that incumbent, that incumbent that it had as a trusted provider in the core of the carrier network, and they expanded outside of that to become a cybersecurity company with the goal of delivering cybersecurity solutions to consumers and small businesses that would be installed in the core of the carrier network, would require no installation by the end user, and thus could get a very high adoption rate. We know that in technology with products, friction is everything. So if you have something that has friction to download and install and patch, you might get very low adoption.

But if you have something that's so easy that I just click a button and it's turned on and I'm protected and I'm satisfied and there's no degradation of service, that's a product that a lot believed every or a very high rate of consumers and businesses would want. So they had the vision to expand their market, pivot in that direction. Of course, pivots don't always come without some turbulence. And so, you know, I'll turn it back to you. I'm sure you have some questions to ask about specifically what might have went right and wrong with that sort of pivot into cybersecurity, the business that they call security as a service or CCAS. No, I actually do have quite a few questions.

And I have a few questions on what you just said. But let me start this podcast the way you do every podcast because I think it makes a nice sound bite and I think it sets it up for the rest of the podcast. The market is a really competitive place. This, I will say there are good articles across the internet. it. You read the companies, you listen to the companies called, like, you're going to pick up on the story in CCAS pretty quickly. What do you think you are seeing that the market is missing that makes this a risk-adjusted alpha opportunity given it's not like they're hiding the ball on this? Yeah, I think that's right. I think what you saw, and we'll get into this more,

I'm sure, but you saw a period of disappointment where CCAS, they've given some very ambitious targets for this business on the basis of having a tent pull deal with Vodafone and assuming that they would be able to sort of see that replicate that same pace of success at every other customer that signed with them. And what ended up happening was they gave a target of about $25 million for CCAS revenue in 2022. For a time, there was a lot of excitement from investors that were involved. And they ended up having to take down numbers for, I think, you know, 8, 12 straight quarters in a row, very long time. Numbers consistently came down. And, you know, for you and I and most investors, we look at that type of a setup and we say this thesis must be broken, this product

must not be actually as valuable as they say. And the view that, you know, I have on this situation, having done a lot of research, is they essentially were correct on the value proposition of CCAS. And where they struggled was with the realistic timeline to implementation and revenue generation, they were just overly optimistic. And unfortunately, that optimism filtered down into how they ran the P&L. And so you saw a company that was burning cash for a long time. And as a function of all this disappointment, you know, the stock had dropped to a low level. Analysts had dropped coverage.

I think a lot of people gave up on the name. More recently, that's changed. And there are some really good articles you can read on Seeking Alpha, for example, on the situation and how it's pivoting. But I think where we have a sort of differentiated and alpha-rich view is this is a company where unless you went out and you spoke to customers, maybe went to some conferences, they have a big one in Spain called MWC, and sort of got a real pulse of what was going on. You could easily look at the P&L and say revenues are down for four years. This is just a secular declining company. Probably it should just be fire sold. But throughout the last couple of years, as we've been involved and also increased our position, it's really been a situation where, you know, we've been hearing very positive things. And, you know, that included that Verizon was really happy.

Verizon, for example, the largest U.S. Tier 1 carrier, 100 million consumer mobile lines and 30 million business mobile lines. They signed a deal with a lot back in 2022, but it didn't launch until the middle of 2023. It launched very incrementally, and so the initial revenue build was adding 100,000, 200,000 of revenue at a time, not millions at a time. And so for investors from a distance, it didn't look all that game-changing. But what we learned upon doing our research was that Verizon's very happy with it, and they were looking to expand it in a very significant way, such that the ultimate scaling of that product could reach a couple hundred million dollars in annual recurring revenue. And so, and we believe that actually recently occurred where there was a significant expansion we think happen, important to know we, this has not been press release by Verizon or a lot. And so we're going off of our knowledge of the product and specifications and the marketing

that Verizon is doing around it. We do not have certainty on this. But it appears to us that Verizon now has expanded that deal. And so, and we had, you know, similar revelations around Vodafone, which also recently expanded its deal and has publicly talked about that with a lot. And so I think the variant view is that, you know, look, this was always an exciting story. The execution was lacking for a time. The vision was overly ambitious and not risk weighted enough in the way that they ran the company. Now that's all changed. You know, you have a company with a free cash flow positive

cost structure. And you're coming off of kind of a 10-year low in the DPI business, which we think is poised to rebound as well for several different reasons. So I think that the view that I have of this company is in a few years, it's going to be, you know, $200, $300 million top line company growing at a high rate with very high incremental margins. And that's clearly not priced into the stock because, you know, even after the move, it's trading it around, you know, $250 million EV on, you know, if that, that would be a one-time-to-multimal on a, you know, 25, 30 percent grower with significant profitability. We know the market would value the company higher if our vision comes to be true. Let me pause you there, because it's funny, the questions I got the

most were on stock price. And I'm going to come back to those, right? People can go look at the stock price. You and I know we scheduled this in December and the stock was three and to, you know, the stock is seven now. So I think we're going to talk about all the reasons alpha, but the most common questions I got was, is this still interesting after the stock move? And then the other questions I got was, I looked at this in 2015 and the stock was where it is today. But let's come back to all that. My key fundamental question I had for you, I've looked at businesses like this in the past. And my big worry here is they have a partnership with Verizon and Vodafone. And that is great, right? They're providing, correct me if I'm wrong, security as a service, and it's mainly

for their business customers. I think particularly Verizon, it's the fixed wireless business. The fixed wireless access business side, right? I guess my question I always have, and my worry I always have, because I've seen some of these businesses before, is it always sounds great. Verizon has 70 million customers in the United States. If we get, you know, 50% of them sign up and they pay $2 a month and our share of that $2 a month is 25%, you know, to the moon, 100 million plus an annual recurrent revenue. And it always sounds great. But my worry is the value is in the distribution, Verizon has all the value, and every time they come back to a lot, they say, hey, we like your product a lot. I like that fun.

We like your product a lot, but this is a buy versus build decision for us, right? We could build this internally and keep the, in my example, 50 cents that we're giving you. We can keep that for ourselves. So always looking at the buy versus build. And then B, look, you provide a great service. We like it, but it's not like you're the only guys in town. So we go to anyone else and we say, hey, we're very. Verizon, a lot's charging us 50 cents per customer per month over our 70 million.

We'll switch it all over to you for if you charge 45 cents, right? And obviously there's switching costs, there's thickiness. But those are the two worries I have. I worry that all that you could basically, in economic terms, I worry all the economic terms goes to the Verizon and eventually like a lot kind of gets sucked out. So I will pause there. I can provide lots of other examples I thought of. I'll pause there and I'd love to hear you're because I think that is the key fundamental question here. Yeah, I think it's one of them.

And I think, you know, probably one of the least fun jobs you can have, I would guess, is being a, you know, salesperson structuring a contract going to a large tier one like Verizon or both of the phone. They have professional procurement teams that are designed and beat up on vendors, run bakeoffs constantly. And I think, you know, that is definitely some of the legacy of the space and some of the reticence that people have when they look at investing in a company like a lot. I mean, I'll make a few points. You know, there are companies with a lot of customer concentration on the operator's side. You know, a company that's actually performed really well that comes to mind as harmonic where they have about 70, 80 percent revenue concentration as a predominantly, you know,

network infrastructure provider to Comcast and charter. Now, they've been able to extract reasonable terms on renewal with these partners from what we can observe in the public financials, and it all comes down to value delivery, right? you know, how much value is being delivered by the vendor, how commoditized or not is the offering, and ultimately how strategic is this to the operator? Because I think it cuts two ways, right? It's very painful. It takes many years to get in as a supplier to the core of Verizon's network. You know, this is something that's integrated at the core of their network. So it takes a long time to get there. It also takes a long time for someone else to come in and unseat you.

And I think one of the sort of magical elements of a lot's positioning here is that it's a very large TAM for a small cap company like a lot, you know, $5 billion. So, Tam, they do, it's by the way, it's consumer and small business. So the Verizon product. I thought the majority was on the, yeah, yeah, okay, perfect. Yeah, the Verizon's business, but actually like Taiwan Far East Tone, for example, which is the largest operator in Taiwan. They have a very successful offering with a lot on the consumer side.

Vodafone actually offers it only to consumers currently. Telefonica has it for businesses. So it's both business and consumer. And the sort of magic here is that Tam is big for a small cap company, but it's not so big that you're bringing in a million different competitors and venture companies that are chasing you. There's not that many players out there. And specifically with what a lot does, they leveraging that incumbency and knowledge of being a DPI provider, scanning traffic, classifying traffic, you know, looking at metadata, looking at patterns and anomalous usage, and providing that back to the operators.

They do that on a security basis so that they're actually scanning the traffic in the network as opposed to what every other vendor in the space that goes to the telco and signs them up for a similar service does, which is they look at the DNS. A DNS lookup is just not as resilient. It's not as robust. It's quite easy to evade in certain scenarios. And it's lighter weights, easier to install, but it's ultimately a more commodity-like offering, whereas what a lot offers is very robust. And, you know, I think for the Vodafone question, right? So Vodafone actually got basically a free lunch when they first did the deal with a lot

because a lot sold a lot of DPI to Vodafone, and they said to Vodafone back in 2013, 2014, let's do the security deal and we'll sell you a license for all your customers, you know? And so Vodafone said, okay, great, we'll pay a lot. I'm making up numbers here, $5 million. We get an all-we-can-eat license. And then not three years later, but Vodafone was on their earnings call talking about how this secure net offering powered by a lot was making $160 million in annual revenue. And so a lot had just sort of sold away the farm to see the market. you know, I think it was a wise decision, but they weren't capturing even a fraction of those economics. And so now 10 years later, coming up on a big renewal with Vodafone that happened last

year, and you can, you know, listen to the conference calls, you can go to the transcripts, you can see what's happened, which is that a lot has expanded the Vodafone deal. They're now offering more products to Vodafone, including for, you know, home internet in addition to the mobile network. And they're getting expanded economics. They're talking very clearly about moving to a CCAS deal off of the perpetual license. They're talking about growth. So Vodafone literally at 10 years to do something different. And they ended up coming back to where they began and upsizing with a lot. And that doesn't guarantee future success. But I think it can give you some comfort that what they're doing here is a little more differentiated.

And with Verizon, you know, Verizon is really emphasizing these what they call cloud-based security offerings that are zero touch, really easy to install. They're really leading in, if you look at their website, around the business internet security, which we know that a lot powers business mobile internet security, which we think they recently expanded to. And you can see that this is a point of emphasis and pride for Verizon. And we don't think they have any plans to try to switch a lot out. you know, pricing, I think is always a consideration, but you also have to think about the operator itself is making revenue off this, right? So there are, you know, a lot of telco equipment companies, including even something like a harmonic, which we think is a great

company, that's sold on a TCO, you know, basis of we're going to save you maintenance costs, or we're going to save you something so you should buy this. But a lot is actually, this is something your customers are paying for. And in the case of Horizon, we think there, you know, there was a Teague's transcript, which talked about 50% plus attach when the product was offered to a customer. And so if Verizon's bringing home tens of millions, hundreds of millions of revenue, that's a big win for some C-level people in the business group, right? And they're probably not what's never said.

A reminder that today's podcast is sponsored by fintool.com, the chat GPT for SEC filings and earnings transcripts. Just ask your question, and FinTool will pull the best answer from the relevant document. whether it's a snippet from an earnings call or a key point from a filing. If you're an analyst or portfolio manager, try FinTool today at fintool.com and take your research to the next level. That's fintool.com. Yeah, because I did want to ask about that, right? So if I'm the customer, right, I've got a small business and Verizon's providing my

internet, my cell phone in some way, shape, or form, right? I just know for me personally, when I sign up for broadband, and then the cable company always comes to me and they're like, hey, you know, do you want to get a, our home security, do you want to get in it for me it's no, no, no, no, no. You know, this is a very, you get the car, you get the rental car, and they say, do you want the rental car insurance?

And everyone says, for the most part, says no, because it's covered by my credit card and the rental car insurance, you know they're making margin. I guess, or I think back to long time ago, but our very younger listeners that might not remember, but the AOL days, right? You dial up an AOL would always hit you like,

hey, do you want our home security or a malware service? And you always say, no, because like, they're offering you probably, a subpar product and it's probably at an elevated price because they need some margin. So I guess my question is me as a customer, Verizon comes to me and says, hey, do you want our security service? And now they, I think it's like two or three bucks a month. So it is small, but me as a customer, why do I need Verizon to provide that service versus going and getting something working for the small businesses, maybe they can't work with someone completely

spoke, but you know, just going and getting something that fits their needs more might be cheaper. Like, I just have in my head, hey, anytime I'm offered an extra by Big Teleco, it's always like, they kind of had an inflated price and they're probably going to make a lot of margin on it. The AT&T, hey, we just sold you an iPhone. Would you like insurance on your iPhone? So what's kind of, why are the customers signing up for this versus doing it on their own or just going without it? I think they're going with it. So there's two different sort of pitches around it. One is that, you know, the internet, so this should be basically clean pipes.

The telco should be delivering you pipes that are effective. effectively clean of potential, you know, spam, ransomware, fraud, all this different stuff, right? And clearly that's not the world that we live in. So, you know, I think there is a real thesis around, you know, I would prefer to access my internet connection and know that I'm not going to be bombarded with fishing attempts that I might click a link accidentally and download something Trojan onto my device and then give away my banking credentials. And obviously, you know, there's different levels of susceptibility depending on user

profiles. But, you know, if you think about, I mean, we all have known someone probably that we thought of as being too smart or too sophisticated to get finished and then they did. And so, you know, I think there is real utility to it. I think the price point of $2 per user per month is not a particularly steep one. You think about the cybersecurity budgets, right, of a lot of companies or the other solutions people might be looking at. And I think the nice thing about the a lot solution is that there's no ongoing maintenance configuration needed. You know, you don't need to make sure you're patched and up to date. It's just running, it's running on Verizon's end, right? It's not running on your end. It's, it's, let's talk about that then. I am a small

business and I sign up for it and I get it from Verizon, right? So what is a lot actually catching? Because what I, what I had initially thought was, they're just going to block it. I try and click a bad DNS or malware. They're just going to block it. But like, if I get fished in my email and I click on that link like how is a lot going to block that unless they're blocking the email so what are they actually providing the service to the customer yeah there there is a lot of cnc blocking that's going on there's also the scanning of um of the traffic itself so again if someone is like using a spoof on dns or some other you know technique to try to get around a block list a lot's going to catch that where other vendors wouldn't catch it and then you know they'll they'll also

of scan potentially for Trojans that you might be downloading on your home network. If you have connected devices in your home, a lot of people have a ton of connected devices in their home at this point. You might have a baby monitor and camera in your child's bedroom. It'll be scanning to see if there's anomalous usage of that camera. A lot of people don't change stock passwords on these connected devices. So they actually, they get hacked at a surprisingly high rate. And then they can even get turned into like DDoS attack devices and botanyl.

nets. And so it's basically scanning the traffic and ensuring that what you're engaging with is safe and secure in the highest level. My kid's NANET, right? You hit the nail on the head. I'm near positive. I did not change the password in that. It gets hacked. So what a lot's going to do is they're going to say, oh, this NANET that was using a meg of data per second because it's a video camera, all of a sudden it's using like 5,000 megs or something. Is a lot just going to shut that traffic down, it's just going to shut that device down or cut it off and send me an email that said, hey, your nan was probably aft or something. Is that kind of the gameplay? Yeah, they would depend on the telco, telco by telco, what their policy would be. But yeah, that would be my guess

would be it would just be shut off. And obviously, there'd be alerts and reports generated on that. And there is a good sort of customization and configurability for people. So, you know, they have a parental control console that comes with each of these services. And again, it's all cloud delivered, zero install, and you can be setting quiet hours. And there's other things you can use for this. But this is really the most robust form of parental control and cybersecurity. And I think that's the real, that's one of the strongest use cases for consumers is that parental control family protection elements to it.

And then I think on the business side, it's even if I pay for some other, products, it seems, given the potential disruption in my business, if I do get fished, that this is probably a smart investment because it's redundancy, right? And this is a lot of, you know, CSOs talk about you need redundancy, you can't rely on having, you know, just, you know, one security product. Like you should have multiple layers. So this is layer one. This is hopefully, even though it's tech, it's layer seven because it looks inside the packet, but it's, it's layer one of your security. It's before the traffic gets to you on the teleco network, the vast, vast majority of it is going to be secure. And that's a great starting point. Now, if you have no

budget for security, you can just be good with that and use nothing other than a lot's product through Verizon. If you're a bigger business or you're in our space and maybe you just, you're dealing with big wire transfers sometimes or whatever, you probably will also pay for other services in addition to that. But I think it actually has a pretty strong value proposition, and it's just not very expensive for most people. It's affordable. So let's go to the stock chart. And I think the two questions that I had for you, I got two on one side and one on the other, but there's going to be two questions. The first thing is somebody's going to pull up a three month stock chart. And again, we started talking December. People can believe me or not,

whatever. The stock was three. As you were talking, last night's close, it was between 7-15-8, right? So I think the first question people are going to talk about is, hey, did I miss it? And what drove this massive run over the past two months? So I guess I'll ask that. And then I have literally the exact reverse of the question to follow up with. Yeah. So I would say, you know, I do not think that anyone has missed it at this point. I mean, it's going to invite more volatility when you have a move like this. So pullbacks obviously should be expected to some extent. But I think the reason for the move, obviously, besides the fact that people, you know, knew you were doing a podcast on a lot and you, and you, they did not know, 20 million, 20 million

jobs. Don't you put that evil on. Yeah. So I think, you know, people, besides that, I think the reason is that there was a period of time where a lot of these things that we're talking about were happening on the ground, but there was just no public evidence of it yet. And so, you know, a guy like me could go around, say, I heard Verizon's expanding the contract or, you know, they're going to be profitable in a quarter, but there's definitely an element of people want to see results, right? They want to see performance. And so I think now you have seen that, you know, they brought in, they did a bunch of changes on the board, on management. They did a big restructuring to cure some of those issues we talked about with the past overspending and lack of sort of

P&L discipline. And, you know, at this point, you have a free cash flow positive company that is at a troth revenue level on its DPI business, we believe, coming off kind of a 10-year low in that business with some real growth drivers. Product refresh, for example, that they just rolled out. And then you have this CECAS business, which has grown consistently at 50% plus. Recently, that growth rate on an ARR and in-period basis has accelerated. We think that ARR growth is going to continue to accelerate. And you have, you know, it's going to come in around maybe $17 million this year, $19 million of ARR, according to their guidance. And, you know, this is growing at 50, 60%. We think it's on the, on the cusp of some step function moves higher in the early

part of next year as they turn on these new contracts. So I think the market is, especially after the last quarter, where they had their second quarter of positive cash flow generation, and profitability was reached non-gap and gap. And I think that that excited people and got people to re-rate the business from where it was trading it's sort of a one-time revenue multiple up to where it is now, which is kind of like a two and a half trailing revenue multiple.

But again, we think that the trajectory of improvement is actually more rapid than the pace of the stock price increase because it was just coming off such a depressed valuation. Let me ask you the reverse of the question just asked you. I used to, in my younger, more eager days, I used to take notes on every single company that got written up on Value Investors Club.com. It's an anonymous website. People can figure out my username pretty easily if they're really into it. But I used to take notes on everyone. So my first notes from this company were from 2015. And my last notes, I think,

were from 2022. So this was written up three times on there. And if you read all three write-ups, they all make a lot of sense. They're all quite bullish. They all say the step change is coming and all three write-ups were to be frank wrong and like the there's one from 2020 that i i don't mean to pick on because i think it was very well done but you know benefit of hindsight they said the subscription business in 2024 was going to be 120 million and i think the numbers the company are disclosing have two of those three numbers in it you know it's just kind of missing the third um so you know i think a lot of people the first focus is going to be the last two months say, oh, did I miss it? And then the other people, including me, I'm looking at it and say,

oh, cool. Like, over the past 10 years, the stock is flat. It's dead money. It sounds great. Like, but it kind of look at this company. I'm like, hey, telecom vendor that for 10 years generated kind of no returns. Like, what is different this time versus how it's been pitched over the past? Forget the 2015 because Secah wasn't really there then. But, you know, the 2020, especially where it said it was on the verge inflecting. It just never really happened. Like, why is this different? Yeah, yeah. I mean, I think, and there's a 2023 late, 2023 right up that you can read that,

they kind of referenced a bunch of that stuff on Vic, right, that, you know, went into some of the past history and what's different now. But I think, you know, again, they were going off a Tam-based methodology, looking at a big Tam and saying, we'll capture a certain percent of that, expecting customers to ramp up really, really rapidly because Vodafone had. And they just didn't have enough data. to know that this was wildly bullish and that, you know, they should not have proceeded the way they did. But I think at the same time, you know, we have to be fair to the old board

and management because they did have, they had the vision to go out there and expand into this segment. You know, they just expanded the deal with Vodafone and with Verizon, which, you know, that happened under new management. There's no question that the building blocks of that were put into place by the old team and board, right? It's just, you know, The pace of approach was overly aggressive, too much spending, too much loud expectations with the market. Now what they're doing is they're going off of bottoms up analysis. They're seeing how many people are signing up with each of these carriers per month. We have it modeled out by each of the customers that they have.

How many monthly subs do we think they're adding? And the numbers are triangulated, right? And the reason why they're at 17 million or 19 million of ARR right now is, is because the pond they're playing in is still quite limited. You know, Verizon, the business FWA group is a million and a half subs. But if you vault into the 30 million subs on the business mobile side with this product that Verizon appears to have launched recently, all of a sudden you're 20X and your Tam that you're addressing at Verizon.

And so that growth rate is going to increase. The other thing is with Vodafone, for example, here they were delivering a valuable service. They just weren't getting paid. now you're getting paid beginning this year on a CCAS basis, and that's going to cause a step function. So I think you have to be pretty in the weeds to understand why it's different, and I think the cynicism is completely understandable after the long period of disappointment. But if you're in the weeds, if you're talking to the new management team, if you're looking at the numbers on a quarterly basis over the last few quarters, I think there's a lot to feel

encouraged about. And certainly, you know, we feel that there's going to be a very strong validation of this company over the course of 2025. We're on record on your podcast and elsewhere with that view. Let's quickly talk to management team. So they hire a new CEO in, I think it's May 2024. He was at Radcom, which is a big tech before, a big telecom provider before this. But I'd love just your thoughts on the new CEO, the management team, because it strikes me, like, as you mentioned, the old management team, whether it's out over their skis or they were investing aggressively into a big growth opportunity and the telecoms can work very slow. But I just love your thoughts on the new CEO, how he's positioned the company,

how you think about him going forward. Yeah, I'm extremely excited about A.L. Harari, the new CEO. He was formerly the CTO of Radcom helped to lead a refresh of their whole technology lineup, repositioned them for growth when they were going through some challenges. And through that, they expanded deals with AT&T and RACU10, you know, two big carriers in the U.S. and in Japan. They have these huge contracts with them, recurring revenue model that he also pivoted the company to. He was promoted to CEO. During his time as CEO, he led the company to double-digit revenue growth, doubled the profit margins from around 8% net income margin to around 20%. There is about 8% of that that's just interest income. A lot of Israeli companies are conservative about keeping a lot of cash

on the balance sheet. But I think AL's track record at RACOM is very impressive. And I think you know, it also, the fact that he jumped to a lot, you know, shows the type of opportunity he thinks exists at a lot. I think he would tell you that he thinks the opportunity to a lot is much more significant than it was at Radcom because of this cybersecurity is a service solution in addition to some opportunities on the DPI side. I think AL's very, he comes across is very, I don't want to say stern, but very, he's very credible. He's not someone that seems like he's getting out over his skis when he communicates. He's a technologist at heart, so he really understands technology.

He understands business development and customer relationships. He's based in Tentafly, New Jersey, which I think, you know, it's across the Hudson, basically from the city. So you think about Verizon, you know, headquarters is practically down the street from him in Basking Ridge. And so, you know, I think that's going to come with some benefits. I think his relationship with AT&T, which was a 40% customer, by the way, for Radcom last I looked, you know, that relationship potentially could lead to to a deal for

a lot at AT&T. And so I think there's some really good stuff in his background. I think he's very strategic and we think highly of him and other shareholders we think do too. And then they also brought in a new CFO. Yeah, Liatna Hume, who we also think really highly of her. She's based out of Israel, which given that, you know, about two-thirds of the employees are there. to have one of the C-level execs there full-time. A-L's there a lot, of course, anyway. But she came from Amdox and Tabula. And, you know, she really, so Amdox does a lot of different things in the

teleco arena, obviously around billing and OSS and things like that. But, you know, I think really it's sort of a elevation of the game of the whole sort of FP&A and just, you know, financial organization that she's bringing in. And what I really like about both of them is they're young. You know, I mean, they're in their 40s. They're people that can lead a company for. And there's great, obviously, old executives or older executives, too. But I like looking at this company and thinking, you know, on the 10-year, 15-year roadmap,

these are people that are in the prime of their careers, entering the prime of their careers, and have a long runway for the shareholders. Look, I just quick, you know how I know I've been looking at like little silly telecom. distributors and partners and everything too long because in my head when I said Radcom I was like oh that's probably a two billion dollar business and then as you said I was like no there's no way a CEO would jump from a two billion and then I looked in there a little two hundred million dollar company which you know is big on ordinary scale but it's small in the grand scheme thing yeah and imagine AT&T and I want to ask two questions about

18T I'd be like almost remiss if I do is there a chance that AT&T would use the same CCAS provider as Verizon is number one do you And I guess a bolt on to that would be like, does a lot have any examples of the two kind of national champions in one country, you both using them? And then the second question I'm going to ask is, I'm assuming AT&T has a CCAS offering, because in part because I Googled and they had something that looked similar, who are they using for their CCAS offering? So I think you can address both those pretty simply, but I'll toss them over to you. Yeah, so I do think that AT&T could switch to a lot and use a lot. lot. Verizon also had, you know, security offerings before they came in and deployed a lot, right? They've had app-based solutions that they've run. They've had managed services from Cisco,

people like that. So a lot was a new vendor because they liked what a lot brought to the table more than other people. You know, in, in Spain, for example, a lot has both telephonica and orange so there's um you know yeah there's there's there certainly are markets where um i don't want to quite you know misspe because i actually they but there are markets where they are providing ccass to uh two of the leading players so that may not be the example that that is actually um no telephonica and votifone in spain so yeah telephonica and bodafone in spain both use um a lot ccass and they're very successful with it and so the telecom world is big right so i see it's a white label yeah it's a white label right so there's there's things that the that the carrier can do to differentiate itself um and it's offering

and there's you know an SDK you can bring in different things into the platform um so it'll never be the be all end all of a telco to just say my whole cybersecurity business footprint is run by a lot um if that were the case then it would be you know more challenging for them to have both 18c and Verizon. But I think it's very realistic that they could win AT&T. AT&T currently, they're using an app-based solution similar to many other companies, and they have DNS-based solutions as well. But no one else has what a lot brings to the table in terms of the true in-line threat prevention, which is just much more robust than the DNS-based solution. And I would also say, you know, the opportunity is big enough at Verizon and Vodafone alone to where all.

a lot could scale this past $100 million of CCAS revenue without winning AT&T. That's exactly what I was to say, like, I'm domestic, and I know I can focus domestic, but look, as I was talking to another company that provides software to telecoms, I was like, what if you don't win AT&T at Verizon? They're like, dude, this is the hardest customers to win if we land one, great, but there's outside of them, you know, there's 100 countries and there's four telecom players at each, and, yeah, be great to land AT&T, but you land three telecom players. city. Yeah.

And they've been doing that too. They just launched one in Czech Republic recently. They have some big wins in Asia Pack and probably get more there. So yeah, there's a lot of different markets. Question on the board. I can't remember. What introduction did I say outer bridge or outer wall? I can't even remember. Outer wall was what Redbox became. We're shorted that one and yeah. You're Roy Wallace. So I think I said outer wall because and the way your name is on the Zoom for this. Anyway, I would be outer wall, but Red box took it when they renamed themselves. So that's okay. Outer Bridge owns, I'm just looking at the 20th. I think there's an update of 13G. According to the 20th, Outer Bridge has 7%.

Klaw Insurance has about 7%. And then there is Lynn Rock Lake Master Fund that owns 22%. So that is a large shareholding. I have no clue who that is, but they have a board, they have a board member there. Aside from then, there's not really any board membership here. I don't believe I was looking last night, I don't believe they had to file the CEO's big comp structure. So, you know, every investor loves the, hey, we're giving you the stocks at five. We're giving you a million options struck at 10, get this to 15 in generation of wealth. So I just want to talk to you for a second about this company's shareholder mindset, right? You've got one big shareholders on the board, which is great, but no other big, no other shareholders of meaning on the board. Like most of other

directors look a little higher Gundy, I don't know what the CEO's constructors. So I wanted to ask you about the kind of the shareholder mindset of the company. Yeah, I mean, I think the executive mindset from AOL and Liat is they're building a big business over the long term with a lot of profitability and recurring revenue. I think, you know, the, we have incredible appreciation for what the board has done recently at a lot. You know, they're basically have turned over the vast majority of the board. You know, the Lynn Rock's on the board. They also brought on a new chairman that we think is great. David Rice, they also brought on before that with our sort of collaboration director

named Rafi Kestin, who was previously COO of Radware, an NDS, which was sold to Cisco for several billion dollars. So they have some real operationally savvy people on that board and strategically savvy. I can't speak for what, I guess, the Lin Rock's long-term approach is on the investment, but they Certainly, they've been around for a long time. If you go back and look at the filings, clearly they've contributed as a director to the turnaround that's happened here. And they also have a convertible note that converts at 930.

The company is net cash, but they have, you know, convert that's kind of right around the money now. And so I think they have a lot of upside from the situation. And certainly if they feel like we do that this could be a, you know, $20, $30, $40, $50 stock in a couple of years time, you know, I think they'll want to play for that type of an opportunity. Obviously, there are exit paths with technology software companies. You know, there's always, you know, interest, especially for a company that's firing in all cylinders.

But, you know, I think there's still a year plus away from proving that out. You know, I don't think they want to sell anywhere below, well, I don't want to put words in their mouth. I don't think they're looking to sell the company eminently, put it that way. but I do think people would love to buy it at these levels. A reminder that today's podcast is sponsored by fintool.com

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That's fintool.com. I want to quickly address. So the legacy, you can tell me what your valuation is, right? I will ask you your valuation, actually. But how let's just talk quickly valuation. We don't need to jump into numbers. I'm not going to share a spreadsheet. But, you know, when you think of value here, how much do you attribute to the legacy

business and how much you attribute to the Ccast business? And if you want to combine the two and give like, hey, here's what we can roughly think for value is that might be great. But that'll help with my next question. Yeah. I mean, I think about it like I think I said earlier, and we should also probably address the sandbine the other large. That's why I was going to ask about the legacy business, because I love that piece of the story.

200 to 300 million of revenue in a few years' time on a consolidated basis with a 25% growth rate and, you know, very high profit margins. I think that's, that business trades at like a, you know, six times revenue multiple, probably, seven times revenue multiple. What's your basis for that? Because like you mentioned harmonics a few times, which I'm not, I'm not super familiar. Yeah. If I remember correctly, that trades at like one-ish times revenue.

And mostly they try to like two, two and a half times. But yeah, they're really, but obviously they have a lot of, you know, really core network hardware type business that they're selling. It's not a product business. It's not a recurring revenue business. If you look at, that's what I'm more familiar with. And most of those trade at like, hey, Fordnet, A10, you know, those are good types of examples of companies that traded several times revenue up to like 10 times revenue. The more security based and the higher your growth rate, the higher

your multiple will be, right? And the more recurrent. So a lot, if they have $140 million, $150 million, C-Cast line in a few years, and they have a, you know, other business that's doing another 125 of revenue, but it's less recurring. You know, you can argue how to blend it out, but if Fortnite Palo get 10 times revenue and A10 gets three, four times revenue, And a lot's growing at the top end of the group, I think six or seven. And again, they'll be real profit and free cash flow behind that, too. So you're probably talking of, you know, PE-based valuation would also be a reasonable way to look at it, like a 20, 30 times multiple, depending on where the profitability shakes out. And there has, I think that transition is a lot nicely.

I have a hard stop at 255. So this might have to be the last question. But I'd love to quickly talk about the P interest in the sector transitions nicely. The legacy business had several competitors. Their largest competitor was owned by P. And I'd love for you just to quickly address that side because I think it's just, you know, I say legacy business and you're going to say, oh, it's all going away. But I think there's an interesting catalysts on that side too.

So I'd love to quickly talk that. Yeah, I'm not going to make you like to pick up your daughter. So we've got, we basically have, yes, the market had consolidated down to a doopoly in DPI. Sandvine found itself on the U.S. sanctions list due to sales that they made in problematic geographies and basically helping government spy on their citizens and do censorship and things that the government didn't like. So Sandvine has gone bankrupt. They're in a stocking horse sales process to sell off the pieces of the business.

They've said they're going to exit 50% of the GOs that they're in or seeds 50% of their revenue away completely. They've laid off 40% of their staff. To be a customer of Sandvine, you have to be looking for alternatives right now. And a lot is going to stand out as the strongest one. Now, it's a slow sales cycle business. You know, it may take months to win a deal or quarters to win a deal. And then it may take quarters after that to ramp.

So this issue has been around for the last six months, but it hasn't shown up in the P&L yet. But we do think there's real deal flow that's going to start to come through and allow that business to come back to growth. A lot also refreshed its DPI product lineup, the TIRS Service Gateway 3, which is significantly more. capable, basically triples the specs of the product. So like we talked about before, this business was kind of cyclical, and you could go through five years where there's no growth, and then you refresh the product, and all of a sudden there's some growth. So I think you have a product refresh coinciding with your biggest competitor, going bankrupt,

exiting a lot of its markets, and that's just a wonderful setup for them. You know, I think it's probably not going to be like a hockey stick revenue growth because of the sales cycles and all that. But it's going to be positive for also just, you know, how the deals get priced and structured, you know, less pricing pressure, you know, just more opportunity, more deals in the sales funnel. And those are the types of problems that are good ones to have, right, as opposed to what they've been dealing with historically. No, look, I think you're absolutely spot on. And there was a cheeky little right at the end of the Q3 call. Somebody asked, hey, the non-ZECA side, what are you guys seeing? And they said, hey, it's a pretty

benign competitive environment, I think, was the quote. And I, you know, in my head, I just think about if you're 18th year of Verizon and Sandvine was a key supplier for some reason. And then they go bankrupt. So you've got all this. And they go bankrupt because they were selling to, you know, they get put on a sanctions list. I have to imagine, you know, these are huge businesses. They don't, they don't want to touch that. And I'd have to imagine that's just if you're a salesperson. And as you said, a lot of other businesses that business might pop up. If you were starting to win, it might pop up the next day. Here, it might not be for 18 months, but I just have to imagine, I mean,

I mean, buy yes, but go ahead, imagine, imagine being a CIO or CTO going to your board at your end when all these decisions get made and saying, we've got this vendor, they're bankrupt, but I think they're going to get stocking horse purchased by, you know. They're bankrupt because they were spying. Yeah. So, yeah, I think there's going to be a lot of deal awards that happen. And like you said, revenue may lag that, but they should be able to at least talk about some progress in that front. We're hoping over the next, you know, a couple of months.

Well, Roy, this has been great. Roy's joining from, are you in Hawaii? Yeah, yeah, I am. We have the early morning in Hawaii. Rory and I have chatted before on a separate name that at one point we might have to do a podcast on. But we love that down the road. And I just want to say before we drop, I mean, Andrew, you're phenomenal interviewer. You do a ton of prep.

Love listening to your podcast and, you know, keep it going, man. I appreciate it. You're going to give me a really big head over here. But Rura, this has been great. Thank you so much for popping on. And looking forward to the second one. All right. Take care, Andrew.

A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.