hold on to your hat! earnings out today after market close!
culled from tim luke's (lehman bro's) latest write-up ... with the normal disclosures.
note to notneiderhoffer: mr. luke confirms your previous mention of lucent/octel's overdue "dud."
-----
Comverse Tech: Previewing Strong 3Q98, Visibility Improving For FY99
Author: Tim Luke 1(212) 526-4993
Rating: 1
Rank (Old): 1-Buy
Rank (New): 1-Buy
Price : $56
52wk Range: $58-29
Price Target (Old): $70
Price Target (New): $70
Today's Date : 11/24/98
Highlights:
* We expect CMVT to deliver another impressive set of results when it reports 3Q98 post close on Tues Dec 1st. Revenues should comfortably exceed our higher end est of $177 mill (+26%) with earnings at least a penny above our consensus est of $0.57 (+57%)
* Beyond strength in October Quarter, believe trends in current 4Q98 remain robust with visibility continuing to improve for 1Q99 & balance FY99. Based on expectations of record backlog up from $149 mill in 2Q98, we are likely to formally raise our FY99 ests.
* Expect highly upbeat management tone underlining strength in US & Europe. Recent investor concerns over 1) International exposure & 2) Competition from Lucent/Octel likely to be allayed by new order wins & increasing backlog/visibility for 1999.
* Expect Asia to be up slightly QoQ ($23-25 mill), L.American outlook
strengthening; new orders in Brazil, Mexico. Following recent move, expect shares to continue to move higher driven by improving sales momentum & potential for estimates to rise.
* Reiterate our 1 Buy rating and our price target of $65-70 based on the global leader in voice messaging & enhanced services achieving a multiple in line with long term growth rate over 25%. Our conservative current FY99 estimate is $2.62.
Previewing Another Strong Quarter
We look for Comverse to deliver another round of strong results post close next Tuesday December 1st. In fact the company appears poised to post its 18th quarter in a row of earnings that exceed street consensus expectations.
We look for revenues to come in above our higher end estimate of $177 million (up 26% YoY). Gross margins should be stable at around 59.5% with operating expenses broadly unchanged as a percentage of sales at around 43-44%. This should pave the way for Comverse beat our consensus level earnings estimate of $0.57 by at least a penny.
Strengthening Outlook, Improving Visibility, Record Backlog
Beyond strong results for quarter ending in October, investors are likely to be even more encouraged by a steadily improving outlook not just for the current 4Q98 ending in January but looking into into FY99. While Comverse does not usually disclose its backlog numbers on a quarterly basis, we believe that the level has again risen from the record $149 million that the company shared with investors in 2Q98.
We believe that strength in CMVT's business has been driven by Comverse Network Systems messaging revenues with the Comverse Information Systems (CIS) government and commercial voice recording business remaining broadly flat QoQ at around 9% of sales. Our checks appear to indicate that demand for voicemail and messaging from core accounts in Europe and the US has remained robust. In particular, order flow from large operators in the US such as Bell Atlantic, Sprint PCS, SBC and Bell South appears to have remained healthy. In Europe, familiar large accounts such as SFR in France and Deutsche Telecom (fixed and mobile) have contributed to good sales.
With respect to Asia, we believe that sales are likely to trend up modestly upwards on a sequential basis from a level of around 14% of sales or $23 million in 2Q98. We maintain that some improvement in demand from regions such as South Korea and Thailand combined with solid trends in China and Japan (which acount for an estimated 80-90% of Comverse's Asian exposure) has contributed to some stabilization of the outlook in the region. At the same time propects in Latin America appear to be increasingly bouyant, with Comverse winning orders in Brazil from new A and B band wireless operators. In addition, we have learned that Comverse has been selected by the Pegaso consortium in Mexico to supply messaging for this nationwide network.
Competitive Positioning Solid: Continuing To Win Against Octel/Lucent
Following the release of earnings management's tone is likely to be upbeat regarding Comverse's competitive positioning versus its primary rival Octel, a division of Lucent Technologies. Investor concerns regarding the potential impact of the recent release of the long delayed IMA platform by Octel has represented an important factor hanging over the shares. Robust momentum in new order wins appears to underscore Comverse's strong positioning as a technology leader in the messaging industry. In addition, it appears the new IMA platform may not have all its features available until 2Q99. We have been especially encouraged by Comverse's succes in securing an important $4 million order from CTI movil in Argentina for a distributed system architecture using a voice over IP backbone. Success in winning this contract clearly underlined Comverse's leadership since arch rival Lucent is actually a part owner of CTI Movil.
Stock Opinion; Reiterate 1 Buy Ahead Of Strong Results And Strengthening Outlook
We believe Comverse's core Network Systems is likely to continue to benefit from expanding demand from wireline and wireless networks around the world as service providers seek to add revenue generating enhanced services such as voicemail and information services. The successful rollout of new advanced features and services such as one touch return may provide additional upside to our revenues and earnings estimates. Meanwhile, Comverse Information Systems division is well placed to exploit the transition from analog to digital recording and monitoring systems by both government agencies and corporations. We are becoming increasingly confident that our estimates for revenue and earnings may prove conservative given increasing visibility on strong revenue growth, improving gross margins and substantial opportunities for operating expenses and the tax rate to trend lower as a percentage of sales. We would highlight that Comverse is well placed to benefit from lower operating costs following the recent decline in the shekel versus the dollar. We estimate that around 40% of CMVT's operating costs are shekel based.
We contend that Comverse's valuation remains compelling at just 21x our conservative FY99 estimates. Our price target of $65-70 is based on our view that over the next several months investors are likely to focus on CMVT's earnings growth in excess of 25% allowing the shares to achieve a multiple of approximately 25x our 1999 estimate of $2.62. |
