CMVT: Beats Estimates Again; Raise Rating to Buy, Lower Target on Valuation
Last Changed 06/04/2001
"First Call Consensus EPS: 1/02E $1.78; 1/03E $2.12; 1/04E NA
OPINION
Comverse Technology (CMVT) reported 1Q results after the market close on June
4, and beat top-line and bottom estimates. We view CMVT's continued steady
performance, and its ability to exceed guidance, even in relatively tough
times for the telecom industry, as a reflection of its market leading
presence in the enhanced services space.
Revenues came in at a record $365 million, Vs our estimate of $356 million,
while EPS reached $0.43 Vs. our estimate of $0.42. Gross and net margins
reached 62.62% and 21.63%, respectively, and were slightly below our
estimates. We had been expecting gross and net margins of 62.75% and 23 %.
Gross margins did increase slightly on a sequential basis, yet net margins
declined from the 22.18% level achieved in the last quarter. Net income grew
by 40% Y-o-Y and 3% sequentially.
Revenues increased 36% Y-o-Y and 5.5% sequentially, while backlog increased
to $325 million from $319 million in the previous quarter. In the past few
quarters, CMVT's backlog had grown faster than revenues, while this quarter
it grew at a sequential rate of approximately 2%. In our note dated May 31,
we stated that there was a chance, given carrier spending issues, that
backlog would not grow faster than revenues during 1Q. Nevertheless, as we
previously stated, we do not believe that slowing backlog growth in the
current environment is an indication that CMVT is entering an difficult
period. We believe slowing backlog growth is more a reflection of current
carrier behavior, where service providers are lowering lead times prior to
ordering, rather than of slowing demand. Indeed, we view the company's
ability to grow backlog as an excellent indicator of its strength.
Across business lines, the CNS division, again driven by strong wireless
business, accounted for 86% of revenues, while Comverse Infosys, a leading
provider of voice and video logging equipment, contributed approximately 9%
of revenues. The Ulticom division contributed 4% of revenues, excluding
sales to CNS.
CMVT's customer base grew to over 370 communication service providers,
including the majority of the largest 20 such providers globally.
Geographically, 30% of the revenues were generated in the Americas,
approximately 45% in Europe, and 25% in the rest of the world.
We believe that the main driver for CMVT's revenue growth will be new
services, as we expect growth of voicemail revenues to lag the company's
overall revenues growth rate. During the quarter, CMVT won SMS contracts in,
among other places, China, which could potentially grow into a major market
for SMS. Indeed, with SMS penetration rates running at only 6% in China, and
with the number of subscribers expected to reach 250 million by 2005 from 100
million today, the combination of increased penetration and rapid subscriber
growth could translate into explosive SMS growth.
CMVT also continues to make strong gains in unified messaging. The biggest
win during the quarter was the February 14th announcement that AT&T Wireless
(AWE - 1H, $17.50) would be taking CMVT's unified messaging platform (along
with CMVT's voicemail platform). With 17 million subscribers, AWE, which was
not a CMVT customer prior to the announcement, is one of the largest carriers
in the US. CMVT also announced a major unified messaging win with T-Mobil, a
unit of Deutsche Telekom (DT - 3M, $20.85). T-Mobil boasts approximately 20
million subscribers, and is one of Europe's largest carriers. In total, CMVT
now has over 45 unified messaging customers. We have not seen any provider
of enhanced services, including Openwave (OPWV - 1H $39.80) announce the same
number or quality of unified messaging wins on the carrier side as CMVT.
Mobile Internet also poses growth opportunities for CMVT. During the
quarter, the company announced a mobile Internet win at UK's One2One, which
had been solely using OPWV's WAP gateways. There was some initial confusion
as to whether CMVT was only providing a billing solution to One2One, but we
do not believe this to be the case. Indeed, we believe that a majority of
the mobile Internet capacity that One2One intends to add next year will come
from CMVT. The company, in our opinion, is faring well for a late-comer to
the mobile Internet space. We believe that the company will continue
announcing second-source wins for its mobile Internet gateways, where its
gateways will run alongside its competitors' gateways.
CMVT also saw its roster of prepaid customers remain stabilized at
approximately 50 in 1Q.
INCREASING ESTIMATES, RAISING RATING TO BUY, LOWERING TARGET TO $100
We are raising our fiscal year ending January 2002 revenues and EPS estimates
to $1.53 billion and $1.79 from $1.518 billion and $1.78. We are maintaining
our FY-2003 revenue and EPS estimates of $1.875 billion and $2.12. Given the
company's strong competitive position, and its discount to competitors such
as OPWV, we are upgrading the stock to a 1H (Buy, High Risk). We are
lowering our price target to $100, based on the company's comparables. OPWV
is currently trading at approximately 80 times 2001 earnings, while CMVT is
currently trading at 33 times. We believe this discount is unjustified. Our
price target translates into a forward multiple of 55 times earnings, which
is still a discount to OPWV.
INVESTMENT THESIS
CMVT has exceeded all expectations in both revenues and EPS while growing its
backlog to record levels for 28 straight quarters. The primary driver of
growth continues to be the digital wireless market that CNS serves. CMVT
has been aggressively developing next generation enhanced services platforms
such as unified messaging, one touch call return, wireless data information
services, and prepaid services. With the number of wireless subscribers
expected to grow to 1.2 billion by 2003 from approximately 300 million in
1998, CMVT faces a fast growing market for such platforms. We believe that
CMVT is a core telecom equipment holding."
- Fred |
