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Technology Stocks : Comverse Technology -- Ignore unavailable to you. Want to Upgrade?

To: Eve Edelson who wrote (594)	12/9/1998 9:30:00 PM
From: JEFF CHAPMAN	Read Replies (1) \| Respond to of 1331

Well after 4 years, I finally sold CMVT today.. Knowing the volatility of CMVT and the fact that it is nearing the $70 price target nearly every analyst has, and the fact it has hit a new high 4 days in a row made me do it... Of course after I sold this morning, it proceeded to rocket up another $2... lol (to keep from crying). Good luck (although I'm hoping for a pullback)

To: Eve Edelson who wrote (594)	12/10/1998 8:26:00 PM
From: Beltropolis Boy	Respond to of 1331

culled from tim luke's latest report dated dec 2. some noteworthy comments on octel under the "record backlog" para. ----- Comverse Technology: Excellent 3Q98, Estimates Raised, Reit 1-Buy Author: Tim Luke, Mark Sue 1(212)526-4993 Rating: 1 Company: CMVT Rank (Old): 1-Buy Rank (New): 1-Buy Price : $58 Price Target (Old): $75 Price Target (New): $75 Today's Date : 12/02/98 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 Highlights: * Post close yesterday, voice mail & enhanced services global leader Comverse Tech once again reported excellent earnings. 3Q98 came in at $0.62 vs $0.39 in 3Q97 (+59%) beating our consensus estimate of $0.57 by a substantial margin. * As previewed, 3Q98 featured strong revenue growth up 27% YoY & 6% QoQ to $178 mill, ahead of our high end est of $176.6 mill. Sales driven by robust US & Europe but Asia also improved QoQ to 16% sales Vs 14% in 2Q98. * Sharp improvement in gross margins to 60.2% Vs 59.5% in 2Q98 above our est of 59.3% reflecting volumes, cost reduction & orders from existing customers (70% sales Vs 66% in 2Q98). Expenses in line. Balance sheet strong. * Outlook appears very bright with backlog up $6 mill QoQ to over $155 mill. Strong order win rates, increased visibility & improved gross margins, slightly lower tax, 9.3% Vs 9.7% lead to new ests for FY98 & FY99 of $2.31 & $2.77 up from $2.22 & $2.62. * Introducing new FY2000 estimate of $3.32. Following another round of excellent results with estimates moving higher we are reiterating our 1 Buy rating and our price target of $70-75 or 25x our conservative FY99 estimate of $2.77. Summary: Post close yesterday, voice mail & enhanced services global market leader Comverse Tech reported robust earnings which comfortably exceeded street estimates. 3Q98 earnings of $0.62 vs. $0.39 in 3Q97 (+59%) beat our consensus estimate. Highlights of 3Q98 included strong revenue growth, improved gross margins, and increased backlog levels providing further visibility for the balance of 1998 and into the first half of 1999. Revenues Come In Ahead Of Our High End Estimate 3Q98 featured strong revenue growth of 27% YoY and 6.4% QoQ to reach $178.1 million coming in ahead of our estimate of $176.7 million. Sales growth was again driven primarily by robust trends in the US and Europe with Comverse seeing strength in both the wireless and the wireline side of its messaging business (we estimate that the split has remained at around 60-40% wireless/wireline.) Sales at the Comverse Information Systems division (government and commercial voice recording) were around 9% of sales up modestly QoQ. While the company does not break out sales on a geographic basis each quarter, we were encouraged that management confirmed Asian sales actually improved to 16% of sales in 3Q98 or around $28 million vs 14% of sales or $23 million in the prior quarter. We believe Comverse enjoyed solid sales to key territories such as Japan, China, Taiwan, and Singapore. During the quarter Comverse added approximately 7 new customers bringing its total customer list to over 270 wireline and wireless service providers around the world. Comverse has no 10% customers. Record Backlog Underlines Robust Outlook, Strong Competitive Positioning Comverse closed 3Q98 with backlog of over $155 million, an increase of $6 million from the prior quarter. We believe the company continued to see strong order wins with new and existing customers. With respect to its competitive positioning against the Octel arm of Lucent Technologies, we highlight that the 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 Octel IMA platform may not have all its features available until calendar 2Q99. As previously reported, we were encouraged by Comverse's recent success 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 Lucent is actually a part owner of CTI Movil. We have also seen several instances where Lucent's switching equipment has been requested with Comverse's messaging platform by some service providers for greenfield applications. Gross Margins Increase Sharply, Operating Expenses In Line With the company enjoying strong repeat business from its core base of customers, continued engineering efficiencies, and a relatively benign pricing environment, gross margins in 3Q98 improved sharply to 60.2% from 59.5% in 2Q98. Looking ahead, we are modeling that gross margins should hold this higher level over the next sevrela [sic] quarters. Operating expenses were broadly in line with our expectations with R&D coming in at $34.2 million or 19.2% of sales and SG&A at $38.6 million or 21.7% of sales. We expect the recent decline in the value of the shekel versus the dollar to put further downward pressure in expenses as a percentage of sales. Tax Rate Moves Slightly Lower During 3Q98 Comverse tax rate moved slightly lower to 9.5% vs. our estimate of 9.7%. We believe this partially reflects the ongoing shift in manufacturing from the US to Israel. Looking forward, we are modeling a normalized tax of 9.3% for the balance of 1998 till 2000. Balance Sheet Strengthened Comverse closed 3Q98 with cash and equivalents of $589 million up from $540 million in the prior quarter. Accounts receivables increased slightly to $194.2 million from $178.8 million in 2Q98 or to 96 days in average from 92 days in average. While we will continue to monitor these receivable levels, we note that they are within the historic range for the company. Inventories in 3Q98 increased to $55 million from $54.9 million but decreased to 71 days in average from 75 days. Comverse maintains a convertible debenture of $415 million. Stock Opinion, Estimates Raised, Comverse Remains A Top Pick In Telecom Equipment Following these strong results with the company beating the consensus expectations (18th quarter in a row) we are once again raising our estimates. Our FY98 earnings estimate increases from $2.22 to $2.31 and our FY99 estimates increases from $2.62 to $2.77. We are introducing an initial year 2000 estimate of $3.32. Our new revenue estimates our $695 million in FY98, $835 million in FY99 and approximately $989 million in FY2000. Our new earnings estimates principally reflect Comverse's improving gross margin outlook as the company sees improving volumes, increased manufacturing efficiencies and a higher level of repeat sales to existing customers. We are using a gross margins level of around 60.2% going forward up from a prior level of 59.5%. We believe that this could prove conservative given an increasingly large percentage of software in Comverse's product mix as the company extends its activities in areas such as SS7. We have also been encouraged by the rising backlog levels and Comverse's ability to continue extend its market share despite the release of an improved competitive offering from Octel/Lucent in the form of the new IMA platform. We believe Comverse is seeing strong new business win rates with the addition of approximately 7 new customers in 3Q98. Comverse's core Network Systems is likely to continue to benefit from the expanding demand from wireline and wireless telecom service providers who are seeking 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 contend that Comverse's valuation remains compelling at just 21x our conservative calendar 99 estimates. Our price target of $70-75 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 conservative calendar 1999 estimate of $2.77. lehman.com