COMVERSE INC CNSI
December 18, 2012 - 6:07pm EST by
aviclara181
2012 2013
Price: 27.21 EPS $2.42 $3.85
Shares Out. (in M): 22 P/E 11.2x 7.1x
Market Cap (in $M): 597 P/FCF 9.9x 6.5x
Net Debt (in $M): -316 EBIT 59 94
TEV ($): 281 TEV/EBIT 4.7x 3.0x

Sign up for free guest access to view investment idea with a 45 days delay.

  • Underfollowed
  • Spin-Off
  • No Debt
  • Potential Acquisition Target
  • NOLs
 

Description

Summary

CNSI is an undervalued and underfollowed spin-off opportunity with favorable industry fundamentals and multiple positive catalysts in the near-term.  CNSI was spun out of Converse (CMVT) on October 31, 2012.

Business Description

CNSI has two divisions, BSS and VAS.

BSS:

CNSI provides converged, prepaid and postpaid billing and active customer management systems (referred to as Business Support Systems or BSS) for wireless, wireline and cable network operators delivering a value proposition designed to ensure timely and efficient service monetization, consistent customer experience, reduced complexity and cost, and enable real-time marketing based on all relevant customer profile information.

CNSI has a leading position in the high-growth converged billing market segment with over 150 customers, including more than 30 customers in the converged BSS market segment. CNSI believes that we could leverage its leading market position and its BSS solution offering to take advantage of the growth in the emerging converged BSS market segment.

CNSI believes that its Comverse ONE converged billing solution is differentiated in the market through its single-system approach to BSS convergence. CNSI also believe that its BSS solutions offer several advantages over competitors’ offerings, including faster time to market and lower total cost of ownership.

VSS:

CNSI enables wireless and wireline (including cable) network-based Value-Added Services (or VAS), comprised of two categories—Voice and Messaging—that include voicemail, visual voicemail, call completion, short messaging service (or SMS) text messaging (or texting), multimedia picture and video messaging, and Internet Protocol (or IP) communications.  VAS is designed to facilitate the transition of customers’ existing network infrastructure and attached systems to IP as part of their efforts to reduce costs and provide next generation services.

VAS is a $900 million value-added services market with CNS is the market leader by a wide margin with more than 300 customers.  

Investment Thesis

 Very Cheap Stock: CMVT is one of the cheapest stocks in the market today trading at 0.4x EV/2014 Revenues and 2.5x EV/2014E EBITDA.  Nearest competitors are DOX (1.5x Rev, 7x EBITDA) and CSGS (1x Rev and 5x EBITDA)

 Overcapitalized: CNSI is well capitalized with no debt and cash of 316 million (280mm cash by year end 2012 + 11mm VAT refund + 25mm in escrow) million expected on balance sheet by Q1 2013.  Cash is approximately 50% of market cap.

 Attractive Potential Takeover Target: We believe the free cash flow characteristics of this business would be attractive to strategic buyers or PE.  When CNSI was under the CMVT holding company structure, the press reported strategic interest in the business. See for example: http://www.reuters.com/article/2011/11/23/us-comverse-idUSTRE7AM2B220111123 (reporting DOX and ORCL as interested strategic buyers).  Problems at the CMVT holdco level that may have prevented sale of this unit in the past are now removed with the completion of this spin. 

 Significant, Identified Cost Cutting Opportunities:  Management believes they can expand EBIT margins to 15% through identified cost cuts.  Q3 adjusted operating margin was 7.4%.   On the Q3 call management identified 40mm+ of SG&A cuts they will implement in the next 18 months.  This is 700 bps of margin expansion on 600mm of sales.  Gross margin improvement opportunities identified in BSS account for the majority of the remainder of the cost cuts.

 Large NOL Balance: The company has ~1.5 billion in gross NOLs (0.5bn federal, 0.25bn state and 0.8bn foreign) and should ultimately have a low tax rate, especially given large OUS sales.  Management is still analyzing potential usage of tax credits and we believe will eventually be able to give more guidance (likely on the Q4 earnings call) as to what tax rates may look like.  Management stated on the Q3 call that taxes on non-US income will likely be 10-15%.  We believe the PV of the NOL is approximately $325 million or ~$15 per share.

 Experienced, Incentivized Management Team: Both the CEO and CFO have worked together at Hypercom, where they successfully restructured the company and sold it to VeriFone.  Mgmt compensation to be set in Q1 2013 and will compensate salespeople on both sales and margin, not just sales as is the case now.

 Underfollowed by the Street: Only three mid-tier banks currently cover the name with potential for more research coverage as the company executes. 

 FCF Estimates and Price Target

 FCF Calculation

 

 

 

 

2013

2014

 

 

 

EBITDA

76

111

Capex

(10)

(10)

Cash Interest Expense

0.0

0.0

Cash Taxes(1)

(6)

(9)

FCF

60

91

 

 

 

Current TEV

297

297

FCF/TEV

20%

31%

1.  Assumes 10% total company tax rate, actual tax rate could be lower given large NOLs and large operations outside the United States.  Also assumes no cash restructuring charges (possible in 2013)

 Price Target Calculation

On the Q3 conference call, management said they believe they can get to mid teens operating margins in 24 months.  Q3 adjusted operating margin was 7.4%.  On the Q3 call management identified 40mm+ of SG&A cuts they will implement in the next 18 months.  This is 700 bps on 600mm of sales).  The balance of identified margin improvement will come from gross margin improvements primarily from the BSS side.

 

2013

2014

 

 

 

Bookings

590

625

EBIT Margin

10.0%

15.0%

EBIT

59

94

DA

17

17

 

 

 

EBITDA

76

111

Target Multiple

7.0

7.0

EV

532

777

Net Cash

316

316

PV of NOL

325

325

Equity Value

1249

1527

S/O

21.9

21.9

Target Price

57.0

69.7

% Return

110%

156%

 

Risks

Economic weakness

Continued carrier consolidation

Share loss to competitors

Failure to cut costs

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  1. Management continues to execute and cut costs
  2. Potential for special dividend or buyback
  3. New customer announcements
  4. Increased street coverage and familiarity
  5. Potential for acquisition by a larger player (economies of scale) or private equity
    sort by    

    Description

    Summary

    CNSI is an undervalued and underfollowed spin-off opportunity with favorable industry fundamentals and multiple positive catalysts in the near-term.  CNSI was spun out of Converse (CMVT) on October 31, 2012.

    Business Description

    CNSI has two divisions, BSS and VAS.

    BSS:

    CNSI provides converged, prepaid and postpaid billing and active customer management systems (referred to as Business Support Systems or BSS) for wireless, wireline and cable network operators delivering a value proposition designed to ensure timely and efficient service monetization, consistent customer experience, reduced complexity and cost, and enable real-time marketing based on all relevant customer profile information.

    CNSI has a leading position in the high-growth converged billing market segment with over 150 customers, including more than 30 customers in the converged BSS market segment. CNSI believes that we could leverage its leading market position and its BSS solution offering to take advantage of the growth in the emerging converged BSS market segment.

    CNSI believes that its Comverse ONE converged billing solution is differentiated in the market through its single-system approach to BSS convergence. CNSI also believe that its BSS solutions offer several advantages over competitors’ offerings, including faster time to market and lower total cost of ownership.

    VSS:

    CNSI enables wireless and wireline (including cable) network-based Value-Added Services (or VAS), comprised of two categories—Voice and Messaging—that include voicemail, visual voicemail, call completion, short messaging service (or SMS) text messaging (or texting), multimedia picture and video messaging, and Internet Protocol (or IP) communications.  VAS is designed to facilitate the transition of customers’ existing network infrastructure and attached systems to IP as part of their efforts to reduce costs and provide next generation services.

    VAS is a $900 million value-added services market with CNS is the market leader by a wide margin with more than 300 customers.  

    Investment Thesis

     Very Cheap Stock: CMVT is one of the cheapest stocks in the market today trading at 0.4x EV/2014 Revenues and 2.5x EV/2014E EBITDA.  Nearest competitors are DOX (1.5x Rev, 7x EBITDA) and CSGS (1x Rev and 5x EBITDA)

     Overcapitalized: CNSI is well capitalized with no debt and cash of 316 million (280mm cash by year end 2012 + 11mm VAT refund + 25mm in escrow) million expected on balance sheet by Q1 2013.  Cash is approximately 50% of market cap.

     Attractive Potential Takeover Target: We believe the free cash flow characteristics of this business would be attractive to strategic buyers or PE.  When CNSI was under the CMVT holding company structure, the press reported strategic interest in the business. See for example: http://www.reuters.com/article/2011/11/23/us-comverse-idUSTRE7AM2B220111123 (reporting DOX and ORCL as interested strategic buyers).  Problems at the CMVT holdco level that may have prevented sale of this unit in the past are now removed with the completion of this spin. 

     Significant, Identified Cost Cutting Opportunities:  Management believes they can expand EBIT margins to 15% through identified cost cuts.  Q3 adjusted operating margin was 7.4%.   On the Q3 call management identified 40mm+ of SG&A cuts they will implement in the next 18 months.  This is 700 bps of margin expansion on 600mm of sales.  Gross margin improvement opportunities identified in BSS account for the majority of the remainder of the cost cuts.

     Large NOL Balance: The company has ~1.5 billion in gross NOLs (0.5bn federal, 0.25bn state and 0.8bn foreign) and should ultimately have a low tax rate, especially given large OUS sales.  Management is still analyzing potential usage of tax credits and we believe will eventually be able to give more guidance (likely on the Q4 earnings call) as to what tax rates may look like.  Management stated on the Q3 call that taxes on non-US income will likely be 10-15%.  We believe the PV of the NOL is approximately $325 million or ~$15 per share.

     Experienced, Incentivized Management Team: Both the CEO and CFO have worked together at Hypercom, where they successfully restructured the company and sold it to VeriFone.  Mgmt compensation to be set in Q1 2013 and will compensate salespeople on both sales and margin, not just sales as is the case now.

     Underfollowed by the Street: Only three mid-tier banks currently cover the name with potential for more research coverage as the company executes. 

     FCF Estimates and Price Target

     FCF Calculation

     

     

     

     

    2013

    2014

     

     

     

    EBITDA

    76

    111

    Capex

    (10)

    (10)

    Cash Interest Expense

    0.0

    0.0

    Cash Taxes(1)

    (6)

    (9)

    FCF

    60

    91

     

     

     

    Current TEV

    297

    297

    FCF/TEV

    20%

    31%

    1.  Assumes 10% total company tax rate, actual tax rate could be lower given large NOLs and large operations outside the United States.  Also assumes no cash restructuring charges (possible in 2013)

     Price Target Calculation

    On the Q3 conference call, management said they believe they can get to mid teens operating margins in 24 months.  Q3 adjusted operating margin was 7.4%.  On the Q3 call management identified 40mm+ of SG&A cuts they will implement in the next 18 months.  This is 700 bps on 600mm of sales).  The balance of identified margin improvement will come from gross margin improvements primarily from the BSS side.

     

    2013

    2014

     

     

     

    Bookings

    590

    625

    EBIT Margin

    10.0%

    15.0%

    EBIT

    59

    94

    DA

    17

    17

     

     

     

    EBITDA

    76

    111

    Target Multiple

    7.0

    7.0

    EV

    532

    777

    Net Cash

    316

    316

    PV of NOL

    325

    325

    Equity Value

    1249

    1527

    S/O

    21.9

    21.9

    Target Price

    57.0

    69.7

    % Return

    110%

    156%

     

    Risks

    Economic weakness

    Continued carrier consolidation

    Share loss to competitors

    Failure to cut costs

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    1. Management continues to execute and cut costs
    2. Potential for special dividend or buyback
    3. New customer announcements
    4. Increased street coverage and familiarity
    5. Potential for acquisition by a larger player (economies of scale) or private equity

    Messages


    SubjectRE: cash on hand
    Entry12/18/2012 06:46 PM
    Memberaviclara181
    Management has indicated on roadshows that dividends and buybacks are options they will consider after several quarters as a standalone company. 

    SubjectRE: Sell-side EBITDA/EPS
    Entry12/19/2012 07:59 AM
    Memberaviclara181
    Potential definitional issues (vary by analyst) plus, in general, biggest variance is not giving the company credit for identified cost cuts (discussed on Q3 conference call)
     
     

    SubjectRE: Revenues
    Entry12/19/2012 08:18 AM
    Memberaviclara181
    Book/bill is less than one due to burn off of deferred revenue.  On the Q3 call management stated it believed that FY2013 bookings could be flat or up Y/Y.  Also, a new, easier to use version of BSS product is expected to launch in 2H 2013. 

    SubjectRE: cash on hand
    Entry12/19/2012 08:23 AM
    Memberaubrey
    Do you think that this cash can really be considered excess cash or even cash to net off the enterprise value? It looks to be advance payments as it is more than exceeded by the deferred revenue liabilities. Is this cash you could really extract? I certainly wouldn't pay for it if I was buying the company.

    SubjectInsider ownership?
    Entry12/19/2012 08:24 AM
    Memberrab
    Does the management team and/or board own significant stock?  I cannot find this information (no proxy yet).  It would seem as though the next year or two could be a work in process and that a sale would be off the table for now, unless management owns a ton of stock.  Thoughts?

    Subject3Q conf call sounded awful
    Entry12/19/2012 09:41 AM
    Memberotto695
    company lowered bookings outlook from $700M to $600m on the call (huge downtick).  Also, implied Q4 will be down from Q3 and that Q1 will continue to be weak.  I  am not saying that there isnt potential medium/long-term, but why would you want to own a business that is essentially falling off a cliff in the short-run?
     
    also, minor point:  they implied higher caopex for f13 & F14:  seemed more like $18M for F13 and $15m for 14.
     
     

    SubjectRE: 3Q conf call sounded awful
    Entry12/19/2012 11:58 AM
    Memberstraw1023
    I wrote this up (as CMVT stub -- but essentially exact same trade at $26.30) a year ago. Some of the questions being asked about dfd revenue are addressed on other thread.
     
    I continue to like it, but due to the weak numbers pointed out by otto at al., I like it less than I did a year ago.
     
     

    SubjectRE: RE: cash on hand
    Entry12/19/2012 12:04 PM
    Memberaviclara181
    Management has told investors on the road that they believe there is significant room to return capital to investors over time and that the company is overcapitalized.  Undoubtedly they will not payout every penny and lever up because they need some cash on balance sheet to show credibility to customers.  However, we believe there is potential in the future for capital return via dividend and buyback. 

    SubjectRE: 3Q conf call sounded awful
    Entry12/19/2012 01:25 PM
    Memberaviclara181
    We'd love to see bookings/revs growing Y/Y, however, if that were the case, we believe the stock would not trade at this valuation.  Also, company booking expectations for 2012 have been around at the 600mm level for some time.  See for example, Sept 7, 2012 conference call: "As Philippe said, we are targeting modest bookings growth in fiscal 2012 above the 2011 level of $600 million."  (http://www.sec.gov/Archives/edgar/data/803014/000119312512388068/d408867ddefa14a.htm).  We did not interpret "modest growth above 600mm" to mean 700mm.

    SubjectRE: RE: 3Q conf call sounded awful
    Entry12/19/2012 02:05 PM
    Memberotto695
    But that tune has changed to modestly lower bookings (no longer "modest bookings growth") for 2012 versus 2011, AND they have materially lowered F13 bookings from an earlier (summertime) projection of $700m to about $600m and even that is back-half loaded.  Yikes!
     
    After hearing the call and looking at the Street etsimates for Q4 in particular, I am tempted to short this name as I think there is a good probability they miss Q4 forecasts big-time and the stock drops $5 from here.

    SubjectCash and EV/EBITDA
    Entry12/27/2012 03:16 PM
    MemberSaltaire
    Cash on Oct 31, 2012 balance sheet is 205MM (excluding restricted cash).  How do you get to 280mm cash by year end 2012?
     
    Also, the current EV/LTM EBITDA is 8.0x ($426MM EV/$53MM EBITDA).  What is your EV/LTM EBITDA?  How do you arrive at 2.5x EV/2014E EBITDA?  Thanks.

    SubjectRE: Cash and EV/EBITDA
    Entry05/01/2013 06:29 PM
    Memberaviclara181
    Company reported today and indicated 305mm of cash on balance sheet (45mm of which is restricted).  Not included in this number is 25mm is in escrow at CTI and the company should receive this in 18 months provided no unanticipated litigation emerges.  Bookings for the year were 545mm and the company guided on the conference call for modest growth Y/Y.  Operating margin guidance is for mid teens operating margins (after cost outs are complete).  Assume 15% operating margin after cost outs are complete on 600mm of bookings you have EBIT of 90mm.  Current TEV is approximately 300mm. 

    SubjectRE: RE: RE: RE: RE: RE: Cash and EV/EBITDA
    Entry05/26/2013 05:30 PM
    Membergreenshoes93
    They told me they need to seem like a credible company to customers so they are going to continue to over capitalize the balance sheet for the foreseeable future.

    SubjectUpdate?
    Entry09/04/2013 12:16 PM
    Memberstraw1023
    This one has been largely dead for a while. The story keeps getting deferred and we seem to always be 18 months away.
     
    Mgmt explicitly predicts "mid-teens" op margins starting by Q4 2014. And they predict $40-45mm of cost savings by then as well. So, my math gets them to a cost structure of $590mm. This means that we need at least $665mm of revenue to arrive at >12.5% op margin. Does this square with others math?
     
    Is this realistic? I wrote this up 18 months ago when mgmt said they were building business with $700mm of revenue/bookings in mind. They have not produced the bookings that I had expected in order to produce $600+ of bookings. 
     
    If mgmt delivers mid-teens margins, this stock will double (even with half its value in cash), but the cost structure means that they need to produce a significant uptick in bookings/revenue.
     
    I think the products remain legit and with significant switching costs, but I am increasingly fearful that they will not produce the bookings to overcome their high fixed cost structure. If so, this becomes an obvious takeover target but not sure mgmt is willing.
     
    Anyone else still following?

    Subjectaviclara
    Entry12/29/2013 10:24 AM
    Memberstraw1023
    aviclara,
     
    Do you still follow?
     
    I have been surprised by recent move. The fundamental news has been mixed at best. They are cutting expenses as promised, but the cash revenue they keep promising is slower in coming than expected. I think there is limited upside from here as a standalone company as I am skeptical they will ever achieve op margins of 15%, even if they exclude stock compensation and amortization of intangibles.
     
    On the other hand, I think this company is an ideal takeover candidate as a strategic acquiror could cut out lots of duplicative overhead and reduce price pressure in the industry. And I do think that a takeover could happen at a significant premium to the current price ($50+).
     
    Is this all about the recently filed 13d? Any thoughts on whether an activist makes a difference?
     
    Also, any thoughts on whether they need to wait until 2 year anniversary of spin-off to sell themselves?
     
    Thanks

    SubjectUpdate
    Entry04/15/2014 05:57 PM
    Memberaviclara181

    Company announced bookings of 490mm for the fiscal year ended January 2014.  This was disappointing vs prior guidance of flat to slightly up, which would have equated to ~545mm.  Bookings were up in every region except for APAC – where a couple of large projects, likely in India, slipped.  Company also pushed out mid-teens EBIT margin target another year (to 2015) given the top line weakness.  Assuming 10% EBIT margin on 490mm of revenues, at today’s close, the company trades at 4.1x 2015 EBITDA and 0.6x 2015 Revenues versus peers DOX (8.4x 2015 EBITDA and 1.7x 2015 Revenues) and CSGS(5.7x 2015 EBITDA and 1.2x 2015 Revenues).  The industrial logic of a transaction remains compelling.  With 14.50 in net cash and no debt, the company remains significantly overcapitalized.  


    SubjectRE: Update
    Entry04/25/2014 07:50 AM
    Memberaa123
    2 quick questions: 
     
    1. is it fair to substract all the cash given the high defered revenue line (around 350 million)? How do you think about that?
    2. why are they only authorizing a 30 million buyback when they seem to have all this cash?
     
    Thanks. 

    SubjectUpdate - CNSI Trading at 2.4x PF EBITDA ex-NOL Value
    Entry06/17/2015 04:59 PM
    Memberaviclara181

     

    On 4/29/2015, CNSI announced the sale of its BSS business to Amdocs for which it will receive proceeds (net of tax) of 265mm.

     

     

    On Monday, CNSI announced acquisition of Acision for ~400mm in cash and stock and posted an investor presentation (http://files.shareholder.com/downloads/AMDA-1A9OQV/290364515x0x835257/185D611F-5F08-4D74-A21A-ABA5895D42CB/Comverse_AnalystCall_6_14_2015.pdf) with pro forma guidance of 380mm of revenue and 100-110 of EBITDA.

     

     

     

    Pro forma the business is 55% recurring revenue and 80% software.

     

     

     

    At the current price of $20, CNSI has a pro forma market cap of ~515mm and a pro forma EV of ~450mm (180mm of cash now + 265mm of BSS asset sale proceeds + 50mm of restructuring costs assumed + 157mm of target debt assumed + 135mm cash paid to target + 35mm earnout)

     

     

     

    Valuation is 4.3x EBITDA and 2.4x PF EBITDA (including 200mm of value for PV on NOL).

     

     

     

    Pro forma FCF at guidance midpoint should be 85mm, giving CNSI an FCF/EV of 19%

     

    Pro forma capex is expected to be approximately 10-15 and cash taxes are expected to be approximately 5-10 mm.  Interest expense should be zero or de minimus as the company is likely to pay down most or all of the debt assumed. 

     

     

     

    At a 8.5x EBITDA multiple and including $200mm of value for the NOL, the stock is worth $45  vs $20 last.

     

     

     

    8.5x multiple x $105mm EBITDA midpoint = 892.5mm + 200mm NOL = 1092.5mm + 68mm cash = 1160.5 equity value/25.8mm PF shares = $45 (assumes earnout is paid)

     

     

     

    In a downside case, assuming 5x 75mm of EBITDA and including $100mm of value for the NOL, the stock is worth $20 vs $20 last

     

     

     

    5x multiple x 75mm EBITDA = 375mm + 100mm NOL = 475mm + 50mm cash = 525mm/25.8 mm PF shares = $20

     

     

     

      Back to top