Tonight, telecommunications value-added services technology company Comverse Technology (Nasdaq: CMVT) is due to release its financials for its first fiscal quarter, ending in April. Yesterday, the company's shares closed at $23.5, giving it a market cap of $4.7 billion. The group's guidance is for revenue of $265 million, and a proforma net profit of $0.11 per share. At the end of the previous quarter, the company had an orders backlog of $568 million. Its management estimates that this figure will show a fall of up to 5% for the first quarter.
In advance of the publication of Comverse technology's report, investment house RBC Capital Markets has issued a report in which it "Sector Perform" rating and $23 price target for the company's share. RBC analyst Daniel Meron belives the share is failrly valued, and sees it being traded in the $21-26 range.
"We believe Comverse will report solid F1Q05 numbers and reiterate its solid outlook. We are looking for F1Q05 revenue of $265.6 million (+3% quarter-on-quarter, 20% year-on-year) and EPS of 11c (+12% quarter-on-quarter, +112% year-on-year), essentially in line with the street at $266.3 million/11c, and guidance at $265 million /11c. Our notion is that a drop in Ulticom's (Nasdaq: ULCM) business will likely take some of the upside from numbers, yet we expect Comverse to meet or exceed our and street estimates." Meron writes.
"Our checks indicate solid demand for Comverse Network Systems (CNS, 68% mix) enhanced service solutions as carriers seek to improve their competitive stance and boost service usage. This, along with continued demand for Verint Systems' (Nasdaq: VRNT) homeland security and business solutions should more than offset the drop in Ulticom's lumpy signaling business.
"We wouldn't read too much into F1Q05 backlog changes coming on the back of seasonally strongest January 2005 as management noted they expect 0-5% decline. Still, comps for Comverse will get tougher as 2005 unfolds as Ulticom looks for 2H05 rebound and we don't expect similar impact of reversals that added $10m of operating income (~20%) in FY04.
"Comverse numbers and the newsflow around the upcoming user forum in late June may propel the stock. We believe Comverse is well positioned to benefit from future growth, yet user-adoption and carrier order-flow may be lumpy as we are still in early market adoption phase. We believe shares are fairly valued and will likely trade in the $21-26 band. We maintain Sector Perform / Above Average risk and would be buying CMVT on weakness.
"CMVT shares are not cheap on absolute or relative basis, garnering 46x our FY05E EPS estimate, while its closest peers trade at 19x FY05E EPS. The gap narrows when accounting for Comverse cash of $8.3 a share, with 30x ex. cash for Comverse vs. 17x to peers. Comverse trades at 35x our FY06E EPS and 21x net cash.
"Our $23 target price is based on 20x FY06E NOPAT (Net Operating Income After Tax) plus net cash of $1.7 billion. Our EV multiple is ahead of peers in enhanced services and blended peer multiple. In our view, the premium is justified by Comverse's competitive positioning, growth profile and strong cash flow generation.
"With its engines on, we believe Comverse is set for growth and should enjoy a favorable news-flow. However, we believe CMVT shares are close to fair value and rate the stock Sector Perform/Above Average Risk.
"Potential impediments to our price target are mainly related to the macro backdrop, competition, telecom and IT spending cycles, technology shifts, and execution:
"We believe the primary concerns for CNS are end-user adoption of 3G services and the expected decline in legacy voicemail sales.
"For Verint, we will be looking closely on government budgets and the acceptance of advanced multimedia content analysis.
"Aside from the telecom backdrop, Ulticom's outlook depends on market players moving from a build to buy mode, as well as the expected shift from legacy SS7 to NGN protocols."
Published by Globes [online], Israel business news - www.globes.co.il - on June 1, 2005