Jefferies initiated coverage of Allot Communications Ltd. (NASDAQ: ALLT) with a buy rating and a price target of $20.

To prevent margin compression and relegation to simply being 'dumb pipes,' we believe carriers will use Allot's DPI (deep packet inspection) technology to contain costs (near term) and create value-added services (longer term). We believe Allot's growth prospects outweigh its high valuation and initiate with a Buy, said Peter Misek, an analyst at Jefferies.

Misek said Internet Service Providers (ISPs), including wireline and wireless carriers as well as cable companies, can use deep packet inspection (DPI) equipment to look into the content of packets flowing through their networks and then prioritize them.

Misek said an analogy is a key router (called a GGSN) that connects the Internet core to mobile end users and acts like a policeman directing traffic at an intersection. DPI equipment is like the traffic policeman’s partner who stands nearby and is equipped with X-ray glasses.

The ability to see into cars allows the traffic policeman to prioritize based on whether they are carrying a sick little girl to the hospital, groceries home or football players who are in the first car of a twenty-car caravan to the game, said Misek.

Misek said that use cases include identifying traffic on the network, throttling heavy users, implementing tiered data caps and enabling personalized data plans for marketing purposes.

Cost containment includes a small number of users consuming an outsized portion of carriers' bandwidth. Allot's products allow the carrier to identify those users and applications and manage that traffic so that it impacts the network less, said Misek.

Allot enables the ability to offer tiered personalized services (e.g., a Facebook mobile plan where Facebook is free but not the rest of the Internet).

Also, Allot provides media caching and video optimization solutions that improve access time and video stuttering for consumers while reducing bandwidth demands on carriers. Half of the bookings for the first half of 2011 were from value-added services, said Misek.

The brokerage established its 2011 EPS estimate for Allot Communications of $0.45 on revenue of $76.8 million and its 2012 estimate of $0.60 on revenue of $93.9 million.

Shares of Allot Communications closed Monday's regular trading down 3.31 percent at $16.93 on the NASDAQ Stock Market.

Facebook NASDAQ Stock Market Facebook