Wall Street analysts are downgrading their recommendations for Comverse Technology Inc. (Pink Sheets: CMVT.PK) and believe that the company's cash distress will force a fire sale at the company.
Comverse's share price fell 31.8% on Friday to $4.90, after the company warned that it "continued to experience negative cash flows from operations" in a filing with the US Securities and Exchange Commission (SEC).
Comverse is planning another wave of layoffs as part of the cost-cutting measuring being instituted by management. The company has also hired Goldman Sachs as its financial advisor to explore strategic and capital raising alternatives, said Comverse CEO Andre Dahan in a letter attached to the SEC filing on the company's results for the first half of the 2010 fiscal year, which ended in July.
Investment house Stifel Nicolaus, which has given Comverse a "Buy" recommendation for four years, cut its recommendation to "Hold".
Comverse and its wholly-owned subsidiaries had $327.4 million in cash and cash equivalents at the end of July, 12% less that the $371.3 million at the end of April, and 27% less than the $448.4 million at the end of January. In other words, Comverse burned through $44 million during its second fiscal quarter.
The cash figure excludes $133.5 million in auction rate securities (ARS), which had a value of $69.3 million at the end of July.
Comverse attributed the plunge in its cash to a $39.1 million expense for professional fees related to restating its financial reports since 2005, $17.7 million for a partial settlement of a securities class action, and $2.5 million in restructuring and other payments, including layoffs.
Comverse attributed the plunge in its cash to a $39.1 million expense for professional fees related to restating its financial reports since 2005 and regain compliance with US securities laws; $17.7 million for a partial settlement of a securities class action and derived actions; and $2.5 million in restructuring and other payments, including layoffs.
Comverse's aggregate assets, including those of its its wholly-owned subsidiaries, are valued in excess of $1 billion. They include cash and holdings in Verint Systems Inc. (Nasdaq: VRNT) and Ulticom Inc. (Pink Sheets: ULCM). Comverse warned however, that despite these substantial assets and its forecast that it will have about $100 million in cash and cash equivalents at the end of April, 2011, the company will have a cash shortfall of about $50 million by the second fiscal quarter of 2011, unless it succeeds in raising capital.
Comverse said that it hopes to cut its expenses by up to $90 million, half in the current fiscal year (ending in January 2011), and the rest over the next 12-18 months. The measures that Comverse Technologies is contemplating to increase its cash include restructuring of and cost-cutting at Comverse Inc., an issue of securities or loans, possibly using assets as collateral, and the sale of 2.8 million shares of Verint.
In his letter Dahan said, "We continue to make progress on the very complex accounting restatement and SEC filing compliance effort that was triggered by the inappropriate actions of past management and inadequate internal controls and accounting processes over many years. Our progress has been significant."
Dahan also expressed disappointment with the company's first half results, including its negative cash flow in the first half, due to weak product bookings, which he attributed to the slow recovery in capital expenditures by the global telecom industry. He specifically mentioned India, has frozen much of its telecom spending pending clarification of new security regulations,
Dahan nevertheless expressed optimism about future sales, "Based on our current visibility, our second half product bookings forecast is projected to show improvement versus the first half. We now expect bookings for fiscal 2010 to be consistent or slightly higher than product bookings for fiscal 2009 based upon such improvement, including an improvement in our Indian business."
As for the cost-cutting, Dahan added, "Most of the cost reduction will result from a reduction in staffing levels and a reduction in programs. These are difficult but necessary measures as it is imperative that we achieve sustainable positive operating cash flow. It is most critical to support this process as a unified team and emerge as a stronger business."
Dahan concluded "I understand these are challenging times… "As we work through this challenging period, and put the distractions and difficulties of the past few years behind us, I look forward to a brighter future for Comverse beginning in the second half, and for years to come."
Published by Globes [online], Israel business news - www.globes-online.com - on August 15, 2010
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