Oscar Gruss & Son has published a new review on Ness Technologies Ltd. (Nasdaq: NSTC) following the company’s first Analysts and Investors Day in New York in which CEO Sachi Gerlitz reiterated his guidance for the year and discussed the company’s growth drivers, future M&A agenda, and business trends. The investment house reiterates its “Buy” recommendation for the company with a target price of $14, compared with $10.54 at Friday’s close.
Gerlitz outlined Ness’s strategy in emerging growth markets, key sectors, and offshore segments through three operations hubs: The US-India, Eastern Europe, and Israel. He also discussed the company’s future strategy emphasizing four elements: revenue expansion through North America off-shoring business, new territories in Eastern Europe and an aggressive acquisition strategy; scaling the over 40 existing independent software vendors (ISV) through the Managed Labs delivery centers and NessPro’s distribution model; strengthening strategic alliances, expanding relationships with tech vendors and an increasing presence in financial services and health care; and expanding higher margin geographies and growing the higher margin Indian offshore business.
Oscar Gruss analyst Ehud Eisenstein says, “A key element of Ness’s strategy is to grow via acquisitions elevating the risks associated with such situations. Ness is currently operating in 16 countries, increasing the risks associated with managing international projects, collecting accounts receivable, trade and tariff restrictions, price or exchange controls, and foreign tax consequences. Annual wage inflation for IT professionals in India and Israel over the past several years has exceeded worldwide averages. If Ness will not be able to successfully manage this trend, it might experience an adverse effect on profitability.”
The investment bank says, “European operations should generate 10-12% in operating margin following an expected margin improvement of the UK business in the third quarter. In the Homeland Security and Defense Segment, management expects 12%-14% operating margin as the pipeline outside of Israel is growing at faster pace. In our view, this segment, which inherently holds higher portions of intellectual property than Ness’s other business segments, has the potential to unlock additional value to shareholders from time to time.”
The investment bank also warns about currency fluctuations: “Most of Ness’s revenues are denominated in NIS and dollars, while a significant portion of the Ness expenses are incurred in the local currencies of the countries in which the company operates, exposing to the risk that fluctuation in the value of these currencies relative to the dollar.”
Oscar Gruss predicts that Ness will post a net profit of $28.8 million ($0.73 per share) on $551 million revenue for 2007, and a net profit of $40.2 million ($1 per share) on $630 million revenue in 2008. The investment house predicts that the company’s 2007 revenue will grow 16.2% in 2007, compared with 2006, but that its net profit will fall by 3.5%. Revenue is projected to grow by 14.3% and net profit by 39% in 2008.
Earlier this month, Ness signed a strategic cooperation agreement with Brocade Communications Systems Inc. (Nasdaq:BRCD), under which Ness has established a R&D center in Pune, India, which will support Brocade's fast growing File Area Network (FAN) business.
Ness has a market cap of $413 million, following a 26% drop in its share price in 2007.
Published by Globes [online], Israel business news - www.globes.co.il - on September 16, 2007
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