luke feels the force. excerpts from lehman bros latest.
fwiw, his next three quarterly estimates are $0.49, $0.50, and $0.51.
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Comverse Tech: New Services & New Order Wins, Strong 2Q99, Reit 1 Buy
Author: Tim Luke (212)526-4993
Rating: 1
Company: CMVT
Rank (Old): 1-Buy
Rank (New): 1-Buy
Price : $71 3/8
52wk Range: $78-20
Price Target (Old): $90
Price Target (New): $90
Today's Date : 06/28/99
Price (As of 6/23): $74
Revenue (1999): 834.6 Mil.
Return On Equity (99): 45.8%
Proj. 5yr EPS Grth: 30.0%
Shares Outstanding: 76.5 Mil.
Dividend Yield: N/A
Mkt Capitalization: 5.66 Bil.
P/E 1999; 2000 : 37.4X; 30.1X
Current Book Value: $4.29/sh
Convertible: YES
Debt-to-Capital: 0.0%
Disclosure(s): C, A
* We continue to be impressed by the rapid rollout of new services and platforms by enhanced services and messaging global leader Comverse Tech. We believe Comverse is emerging as a clear technology leader in the carrier messaging arena with these new offerings enabling CMVT to improve its competitive positioning and secure important new order wins.
* The recent rollout of new CellCaster Cell Broadcast System which allows operators to broadcast information (e.g., traffic, weather, emergency info) to specific locations is the latest example. CMVT is also extending its leadership in the fast growing "prepaid" wireless systems market; highlighted by new order from AIS in Thailand.
* We maintain the ability to offer new revenue generating services such as one touch return & unified messaging may enable CMVT to penetrate several large US wireless operators over the next 12-18 months. Success in securing business from a large US wireless player such as Airtouch, Bell South, PacBell, Bell Atlantic or even AT&T could further boost visibility for FY00/FY01.
* Separately, our sources indicate CMVT has been successful in displacing installed vendors Unisys & Octel as the primary supplier to a large Western European telco. While management has not confirmed this win, we believe CMVT may already be shipping systems. We are currently leaving our estimates unchanged but consider visibility for 2H99 and beyond remains excellent.
* Believe CMVT is enjoying another excellent quarter in 2Q99 with backlog & margins likely to continue their upward trend. We remain confident that our high end estimates of $1.98 and $2.38 in FY99 & FY00 are likely to revised steadily upwards. Reiterate 1-Buy rating; price target $90 or 35-40x FY00.
Software Intensive New Products Gain Momentum, Improving Comp Positioning
We are encouraged by the rollout of Comverse's strong new product stream. New services including the new "one touch" call return service, prepaid systems, email notification, unified messaging and short messaging systems have grown to almost 10% of sales. Comverse has rapidly established itself as the new market leader in areas such as prepaid outselling large players such as Ericsson. The recent order from AIS in Thailand has provided another endorsement of Comverse's leadership in prepaid systems.
Other important new services which are likely to gain momentum in FY99 include caller assistant and voice dialing. New services may move from the current level of 10% of total Network Systems sales (Vs 90% traditional voicemail) to as much as 15% in FY99. These new services should help Comverse continue to outpace the growth of the overall global enhanced services and messaging industry which we estimate to be expanding at around 25% and which should reach well over $2 billion FY99.
We believe the recently launched new CellCaster Cell Broadcast System further extends CMVT's leadership, providing operators with new revenue generating services. The new system allows operators to differentiate their service and increase airtime by providing customized messages and information to subscribers based on specific locations or specific groups of users.
Comverse Well Positioned To Expand Presence With US Wireless Operators
We maintain that Comverse's ability to offer innovative new revenue generating services such as one touch return and unified messaging may enable CMVT to penetrate several large US wireless operators over the next 12-18 months. We note that "live reply" or "one touch return" is enjoying considerable success at Sprint PCS for example. Management has confirmed that improving CMVT's presence within US wireless operators has been identified as a major sales and marketing priority. Success in securing business from any of the large US wireless players such as Airtouch, Bell South, PacBell, Bell Atlantic or even AT&T could substantially boost visibility for FY00/FY01. In our opinion, CMVT's strong new product momentum may help in targeting accounts using equipment from smaller rivals such as Glenayre, Brite/Intervoice and Centigram. CMVT may also seek to exploit product transition challenges experienced by arch rival and US leader Octel/Lucent.
Success At A Large European Telco
Separately, we are extremely encouraged that our sources are indicating that CMVT has been successful in displacing installed vendors Unisys & Octel as the primary supplier to a large Western European operator. While management has not commented on or confirmed this win, we believe CMVT may already be shipping systems. We consider CMVT's ability to offer new services such as one touch return and short messaging and to show a clear migration path to unified messaging may have played a major part in securing this order. The order may also take CMVT's penetration of the world's 20 largest phone company's to 15 out of the top 20. We are currently leaving our estimates unchanged but consider visibility for 2H99 and beyond remains excellent.
Expect Another Excellent Quarter
We believe Comverse has been experiencing excellent business trends in the current 2Q99. We maintain strong order flow may potentially enable CMVT to exceed our higher end revenue estimate for the July quarter of $206 million. At the same time, backlog levels may move upwards from 1Q99's record level of $176 million. With CMVT likely to see further sequential improvement from its record gross margin levels of 61.4% in 1Q99, we believe our earnings estimate of $0.49 may also prove conservative.
Stock Opinion: Excellent Visibility, Price Target $90, Reiterate 1 Buy
Following another recent round of excellent results for 1Q99, we once again raised our estimates. Our FY99 earnings estimates moved from $1.93 to $1.98 and our FY00 estimates increase from $2.26 to $2.38. Our revenue targets for FY99 and FY00 are $847 million and $1.005 billion respectively. We remain confident that these estimates are conservative and are likely to be subject to upward revisions throughout FY99.
We have been encouraged by CMVT's expanding customer list and the company's impressive order momentum. With almost 300 customers (more than 10 added during the quarter) Comverse continues to offer compelling solutions to service providers who are seeking to generate additional sources of revenue with enhanced services platforms. We believe Comverse is continuing to strengthen its competitive position in the area versus its primary competitors such as Octel/Lucent and Unisys. CMVT is expanding its market share across the global enhanced services market.
With Comverse continuing to build its backlog to new record levels, we believe visibility on 2H calendar 1999 remains extremely strong. Beyond the impact of the robust revenue growth outlook, our earnings estimates may also be subject to upward revisions as gross margins continue to improve with CMVT continuing to benefit from a high level of repeat orders from its installed base of customers. Increasing software content may also help boost margins. Based on this robust outlook, we are reiterating our 1-Buy rating. Our price target of $90 is based on CMVT's shares achieving a multiple of approximately 35-40x our new conservative 2000 estimate of $2.38.
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Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the past three years a public offering of securities for this company. C-Lehman Brothers Inc. makes a market in the securities of this company. |
