excerpts from tim luke's latest write-up (part 1 of 2). interestingly, he notes that comverse may spin-off a portion of the CIS division and cites a new competitor, Intervoice (INTV).
-----
Comverse: Mgmt Meetings Stress Excellent Trends/Visibility; Buy (Pt 1/2)
Author: Tim Luke 1(212)526-4993
Rating: 1
Company: CMVT ERICY LU INTV
Rank (Old): 1-Buy
Rank (New): 1-Buy
Price : $68 1/16
52wk Range: $70-29
Price Target (Old): $75
Price Target (New): $85
Today's Date : 12/14/98
Disclosure(s): 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.
* On December 11, Lehman Brothers hosted a series of meetings with management of Comverse Technology that provided an opportunity for management to underline that current business trends remain excellent.
* We now believe Comverse is poised not only to exceed our estimates of $189 million and $0.63 in 4Q98 (ending in January) but also that the outlook for 1Q99 is very strong, with visibility already extending to over half of the quarter's targeted sales.
* In addition, the successful rollout of a series of new services such as prepaid wireless, voice dialing and "one touch" call return should position Comverse to exceed our revenue estimate of $834 million in FY99, while gross margins may continue to beat our projected 60.2%
* Based on this robust outlook, our estimates of $2.77 in FY99 and $3.32 in FY00 are likely to be revised steadily higher throughout 1999. Plans to spin off the slower growth Comverse Information Systems unit could also add to the company's growth rate.
* Given current business momentum and visibility, we view the shares as attractive at 25 times our FY99 estimate. We reiterate our 1-Buy rating and our 12-month price target of $85, or approximately 25 times our conservative FY00 estimate of $3.32.
Management Highlights Excellent Visibility; Backlog Should Move Higher
During a series of meetings held on December 11 in New York, Comverse
management underlined that current business trends remain robust. We were especially encouraged to hear CEO Kobi Alexander confirm that the company has excellent visibility on orders through at least the first half of 1Q99, ending in April. Comverse closed 3Q98 with a record backlog level of around $155 million and we contend that this level is likely to rise again in 4Q98, ending in January. We maintain that our revenue and earnings forecasts for 4Q98 of $189 million and $0.63 remain conservative.
New Services Could Add to Growth Rate
Looking into FY99, we are especially excited about the flow of new systems and services Comverse will be rolling out to its customer base. Following a highly successful trial with a major U.S. wireless operator, Comverse is poised to launch its "one touch" call return service for general availability. In addition, management revealed that it now has won 10 customers for its systems that enable operators to offer prepaid wireless services. We believe Comverse is likely to emerge as a major player in this fast growing market in which Ericsson is currently the market leader. Other important new services that are likely to gain momentum in FY99 include caller assistant, voice dialing and short text messaging. We maintain that the new services could move from the current level of 10% of total Network Systems sales (versus 90% traditional voicemail) to as much as 15%-20% 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 20%-25% and which should reach around $1.5 billion in FY98.
Margins May Continue to Improve Due to New Services, Installed Base, Pricing Environment
The rollout of these new services (which are often highly software intensive) is one factor that may position Comverse to continue to see its gross margins trend upwards. We have modeled gross margins of 60.2% for each of the quarters FY99 -- in line with the level recorded in 3Q98. However, gross margins have trended upward throughout FY98 and we believe the launch of these new offerings, combined with the increased level of sales to Comverse's installed base, may help extend this pattern. In 3Q98 sales to existing customers accounted for around 70% of revenues, up from approximately 66% in 2Q98. Management also commented that the current pricing environment in the messaging industry remains fairly benevolent.
Competitive Positioning (Versus Octel/Lucent and Others) Appears Strong
Management's presentations appeared to confirm our own checks, which indicate that that Comverse is continuing to strengthen its competitive positioning in the messaging industry. We believe Comverse should be able to maintain its current win rate of over 50% in greenfield bids in 1999 and we think the company should be able to continue to hold around 40% market share. We have been encouraged by Comverse's success in competing with the new IMA platform from Octel (which is now a division of Lucent). While investors have expressed some concern regarding the potential impact of the long awaited launch of a new platform by Octel, we believe Comverse is comfortably holding its ground against the IMA. It also appears that the systems may not be fully featured with services such as "one touch return" until 2Q99. We believe Octel's market share is approximately 20%-25% while Unisys holds around 12%-15%. We expect some of the smaller vendors to continue to cede share to Comverse and Octel in 1999. We note, however, the Intervoice (INTV - $321/8; NR) is one player in this sector that has demonstrated strengthening momentum in recent weeks, racking up a number of significant order wins.
(CONTINUED IN PART 2) |
