>speaking of lehman ...
young luke skywalker's Q2 estimate is $199M revenue and $0.46.
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Comverse Tech: Upbeat Meeting With CEO, Excellent Visibility, Reit Buy
Author: Tim Luke, Mark Sue (212) 526-4993
Rating: 1
Company: CMVT
Rank (Old): 1-Buy
Rank (New): 1-Buy
Price : $69 7/8
52wk Range: $70-20
Price Target (Old): $80
Price Target (New): $80
Today's Date: 05/06/99
Price (As of 5/5): $69 7/8
Revenue (1999): 845.8 Mil.
Return On Equity (99): 45.8%
Proj. 5yr EPS Grth: 30.0%
Shares Outstanding: 76.5 Mil.
Dividend Yield: N/A
Mkt Capitalization: 5.27 Bil.
P/E 1999; 2000 : 36.6X; 30.5X
Current Book Value: $4.29/sh
Convertible: YES
Debt-to-Capital: 0.0%
Disclosure(s): C, A
* Yesterday, we met with Comverse Technology CEO Kobi Alexander and received a highly upbeat review of current business trends. Based on discussions with management and our checks with operators, we believe the demand outlook for the global voice-messaging leader is likely to remain very robust throughout FY99 & into FY00. We are reiterating our Buy Rating.
* Management confirmed visibility remains better than at any time in CMVT's history with backlog levels continuing to increase. Comverse continues to benefit from rapid wireless subscriber growth in both Europe & the US with almost all mobile handsets now offering voicemail.
* Improving demand trends in Japan & parts of SE Asia are also boosting visibility. Our checks appear to endorse management claims that CMVT is continuing to gain share in wireless messaging. Believe CMVT is now positioned to make major gains at US RBOC wireless accounts.
* CMVT also appears poised to benefit from strengthening demand in the wire-line residential messaging market as highlighted by Bell South's recent broad rollout of messaging. Believe our estimates for sales & earnings in 2Q99 & FY99 of $199 M/$0.46 & $846 M/$1.88 respectively remains conservative.
* Based on CMVT's excellent positioning in a fast expanding market, we are reiterating our 1 Buy rating & our price target of $80 or 35x our conservative FY00 estimate of $2.26. CMVT is a Lehman Brothers 10 Uncommon Value Selection.
Summary:
Yesterday, we met with Comverse Technology CEO Kobi Alexander and received a highly upbeat review of current business trends. Based on these discussions with management as well as our own checks with operators, we believe the CMVT remains excellently positioned in the fast expanding messaging market and that our estimates for CMVT remain conservative.
Visibility Remains Excellent
During the meeting management confirmed that visibility for Comverse has continued to strengthen over the last several months. We believe that backlog levels stand at record levels and the 1Q99 backlog figure should improve on the impressive $164 million seen at the end of 4Q98.
US Accelerating, Europe Still Robust, Japan Improves, Parts of SE Asia Pick Up
We maintain that part of management's optimism is based on its strong mix of improving demand across several geographies. Rapid wireless subscriber growth in the US market has helped boost demand at key US accounts such as Sprint PCS and Bell Atlantic. As wireless usage has soared in the US with the advent of schemes such as "One-Rate" plans, demand for messaging has increased sharply. At the same time, European operators have also been continuing to add subscribers at a fast pace. Japan has been showing steadily improving trends in recent months and it appears some of the SE Asian countries are also showing new signs of life. Korea, Singapore and Thailand are all showing sequentially strengthening orders.
Wire-line Improving Trends
In the wire-line arena, it appears that the US RBOCs are beginning to display a more aggressive approach towards the rollout of broad-based residential messaging. We have been encouraged by the progress of Bell South in its rollout and believe that other operators may follow this lead as they look for incremental revenue generating opportunities.
Excellent Competitive Positioning/Market Share Increasing
In our opinion, Comverse's competitive positioning continues to strengthen. Comverse has benefited from delays in Octel/Lucent delivering a fully featured version of the IMA platform in winning accounts such as Mannesmann in Germany and SFR in France. Looking forward, in 1999 we would expect CMVT to further extend its share gains over Octel. We believe CMVT may now have a major opportunity to extend its market share by targeting the US accounts of vendors such as Centigram, Brite and Unisys. Management confirmed that it has recently launched a major new initiative to target US RBOC accounts. As noted in our "1999 Guide To Communications Networks & Equipment", we believe CMVT has around 36% share of the total enhanced services and messaging market which we estimate at $2.1 billion in 1998.
DGM&&S Spin-Off Remains A Possibility
Management confirmed that the potential spin-off of the DGM&S division remains a possibility. DGM&S is a world leader in Advanced Intelligent Messaging solutions and sells independently to many of the world's leading vendors and operators. DGM&S had approximately $20 million in sales in 1998.
Stock Opinion: Excellent Visibility, Ests Remain Conservative, Reit 1 Buy
Based on this strengthening business trends and excellent visibility we believe our estimates remain conservative. Our FY99 and FY00 estimates are $1.88 and $2.26 and our revenue targets for FY99 and FY00 and $845 million and $1.001 billion respectively. We believe these estimates remain conservative and may be subject to upward revisions throughout FY99.
CMVT's expanding customer list and the company's impressive order momentum has encouraged us. With approx. 300 customers (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. We maintain that CMVT is continuing to expand its market share across the global enhanced services market.
With Comverse continuing to build its backlog to new record levels we believe visibility on 1H99 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 Comverse continuing to benefit from a high level of repeat orders from its installed base of customers. Increasing software content may also help boost gross margins.
We are reiterating our 1-Buy rating. Our price target remains at $80 and is based on our view that over the next twelve months investors are likely to focus on CMVT's earnings growth in excess of 25% allowing the shares to achieve a multiple of approximately 35x our calendar 2000 estimate of $2.26.
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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. B-An employee of Lehman Brothers Inc. is a director of this company. C-Lehman Brothers Inc. makes a market in the securities of this company. G-The Lehman Brothers analyst who covers this company also has position in its securities. |
