Comverse published its Q4 results today. And guess what? Per share profits are again $0.03 above analysts' forecasts. How very surprising.
The familiar refrain about Comverse chairman and general manager Kobi Alexander's fabulous ability to manage analysts' forecasts is probably not new to our readers. It's common knowledge that companies gear analysts' expectations for certain results only to "surprise" them in the end. What could really be surprising, however, is that Comverse is second only to Cisco in terms of inflated share price.
Comverse is currently trading at a company value of $17 billion, which means a p/e ratio of 75 for 2001 - just like Canadian company Nortel. Ericsson is trading at a p/e ratio of 68, and Nokia at a p/e ratio of 75. Only Cicso is trading at a p/e ratio of 100. But Cicso is Cisco, and it is still growing by 60-70% a year, unlike Comverse, whose annual growth rate is only 27%.
We asked Comverse Networks VP Finance Eilon Michaeli whether he didn't think things were beginning to go a bit far. His reply: "The p/e ratio indicates market expectations. In our case, I estimate that the market knows we're not only an idea-hatching company, but also a serious company with proven results. I know that investors take this into account".
In an article entitled "Is the Comverse Share Expensive? Everything's Relative", published three months ago, we wrote that a company value of $10 billion for Comverse was only the beginning. Since then, the share has surged 70%, but this is apparently not enough for Elan Zivotofsky of Goldman Sachs. Zivotofsky set Comverse's target price at $275 for 12 months. This means an upside of 24% or a "proper" economic value of $21 billion for Comverse.
Comverse executives are doing all that is necessary for the share to continue climbing. They're cooking up the issue of a subsidiary called Ulticom. They're making a 2 for 1 sharesplit. They're racing into the cellular Internet sector. Last but not least, they're buying Loronix, the leader in the DVD market, which is forecast to grow to $1 billion in a few years. So, regardless of the question of whether Comverse is expensive or not, it's impossible to withhold credit from one of the most successful management teams ever to have emerged in the Israeli high-tech sector.
Through its fully owned subsidiary, Comverse Networks, Comverse is the leader in supplying voice mailbox equipment and value-added services for telephony and wireless companies. It supplies its products to 320 communications companies around the world.
Comverse Networks is one of the main factors in the $50 million net profit posted by Comverse in the fourth quarter of 1999. This profit represents an increase of 56% over the net profit in the corresponding period of 1998.
The company has another division by the name of Comverse Infosys, which deals with multimedia and digital recording and retrieval for law enforcement and intelligence agencies. The company has also recently entered the field of computerized telephony support systems (call centers) used by organizations for telemarketing, technical support, and direct marketing to customers. Civilian activity is growing at a rate estimated at 100% per year.
This division is expected to receive a lot of media attention if the forecasts of the Goldman Sachs investment house are realized. "The acquisition of Loronix makes the spin-off of Comverse Infosys feasible during the next 12-24 months", stresses Elan Zivotofsky. He says that Comverse management has emphasized that this move is a possible strategic option.
Ulticom, the subsidiary designated for a Wall Street Issue, was acquired by Comverse 4.5 years ago, and has developed a platform called Signalware, which facilitates the creation of applications enabling telephone and wireless companies to provide added value, such as pre-paid services, keeping the same telephone number for the subscriber even when he transfers to a different telephony company, "follow me", etc. Another product, Nexworx, provides a similar solution to Internet telephony providers.
The wireless Internet field is a natural step for Comverse, which is working in that direction. The acquisition eighteen months ago of technology from US company Intouch helped turn an idea into a product. The company is currently in the final marketing and development stages of its voice portal, which will enable the user to receive announcements and access to information, and to implement various e-commerce operations and money transfers by speaking into a handset.
Published by Israel's Business Arena on 9 March, 2000