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

To: Al Van Putten who wrote (617)	1/11/1999 1:34:00 PM
From: Beltropolis Boy	Respond to of 1331

here's tim luke's latest. normal disclosures apply. ----- Comverse Technology: Visibility for 4Q98 & 1Q99 Remain Excellent Author: Tim Luke, Mark Sue 1(212)526-4993 Rating: 1 Rank (Old): 1-Buy Rank (New): 1-Buy Price: $71 52wk Range: $72-29 Price Target (Old): $85 Price Target (New): $85 Today's Date : 01/04/99 Fiscal Year : JAN Price (As of 12/31): $71 Revenue (1998): 694.5 Mil. Return On Equity (98): 36.7% Proj. 5yr EPS Grth: 25.0% Shares Outstanding: 51.0 Mil. Mkt Capitalization: 3.55 Bil. P/E 1999; 2000 : 25.6 X; 21.4 X Current Book Value: $6.43/sh Convertible: YES Debt-to-Capital: 0.0% Disclosure(s): C, A * We believe global voice mail & enhanced services leader Comverse Technology is continuing to enjoy robust business trends. * Current discussions with management supplemented by our own service provider checks appear to indicate that CMVT may exceed our revenue and earnings estimates of $189 M and $0.63 in the current 4Q98 (ending January 1999). * Outlook for 1Q99 also remains very strong with visibility already extending to over half of the quarter's targeted sales. Add to this the successful rollout of a series of new services such as prepaid wireless, voice dialing & one touch call return and the company should exceed our revenue estimate of $834 M in FY99, while increased repeat business and engineering efficiencies may allow gross margins to beat our projected estimate of 60.2%. * In addition Comverse has indicated plans to spin off its slower growing Information Systems unit (10% of sales) which may also add to the company's overall growth rate. * Based on the current robust outlook we believe our estimates of $2.77 in FY99 & $3.32 in FY2000 may prove to be conservative. We are reiterating our 1 Buy rating. Our 12 month price target is $85 or 25 times our conservative FY2000 earnings estimate of $3.32. Summary: Visibility Remains Excellent Our recent discussions with the management of Comverse Tech appear to indicate that current business trends remain robust. We now believe that the company has excellent visibility on orders through until at least the first half of 1Q99 which ends in April. Comverse closed 3Q98 with a record backlog level of approx. $155 million and we believe that this level is likely to rise again in 4Q98 which ends in January 1999. We note that our revenue and earnings forecasts for 4Q98 of $189 million and $0.63 may prove to be 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 US 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 which are likely to gain momentum in FY99 include caller assistant, voice dialing and short text messaging. We maintain the new services may 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 Comnverse 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 upwards throughout FY98 and we believe the launch of these new offering combined with the increased level of sales to CMVT'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. Spin-Off Of Comverse Info Systems Could Increase Corporate Growth Rate Investors may be encouraged by management's confirmation that it is considering the possible spin off of the company's Comverse Information Systems (CIS) division in 1999. The CIS division which we estimate at around 9-10% of revenues, comprises Comverse's governmental recording business which uses the AudioDisk brand name with the commercial voice recording unit which targets the call center market using the Ultra platform. While we maintain this unit has significant potential in both the government recording market and the call center arena a number of factors including the impact of legislative delays on the US government market have resulted in revenue growth from CIS to be in the 10-20% range. This is somewhat lower than the 25-35% growth rates seen in the Network Systems area. We consider that the CIS unit could benefit from being more tightly focused as an independent entity. At the same time Comverse's overall revenue growth rate might trend upwards if the company was exclusively targeting the enhanced services market. Stock Opinion, Outlook Following strong recent 3Q98 results with the company beating the consensus expectations (18th quarter in a row) we raised our estimates once more. Our FY98 earnings estimates moved to $2.31 and our FY99 estimates increased to $2.77. We also introduced an initial year 2000 estimate of $3.32. Our revenue estimates are $695 million in FY98, $835 million in FY99 and approximately $989 million in FY2000. Our confidence in these estimate moving upwards over the course of 1999 partially reflects 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. As highlighted earlier we believe that our 60.2% estimate for FY99 could prove conservative given an increasingly large percentage of software in Comverse's product mix. 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. We contend that Comverse's valuation remains compelling at 25x our conservative calendar 99 estimates. Our price target of $85 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 25x our conservative calendar 2000 estimate of $3.32. ----- 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.