|Shares Out. (in M):||209||P/E||NA||NA|
|Market Cap (in $M):||1,320||P/FCF||3.1x||2.8x|
|Net Debt (in $M):||-1,040||EBIT||97||109|
Comverse Technology, Inc. (CMVT) is a holding company consisting of Comverse, Inc, a wholly owned subsidiary which houses the company's core Comverse Network Systems (CNS) business, 57% ownership of publicly traded Verint Systems (ticker: VRNT), 69% ownership of publicly traded Ulticom (ticker: ULCM), and 70% ownership of Starhome. I estimate that Comverse has approximately $5.65 per share in cash and cash equivalents (see table under valuation section), or $4.80 per share after penalizing the company for a $175m class action lawsuit settlement stemming from an ongoing stock option backdating scandal. Incorporating the settlement into my enterprise value for the CNS division, based on CMVT's current share price of $6.32, CNS is trading at 1.9x FY09 EBITDA and offers a 32%+ free cash flow yield. This is an incredibly cheap price to pay for one of the market leaders in the large and growing global telecommunications market, with a large installed base of customers (that face very high switching costs) which provide a reliable and growing stream of recurring maintenance, service and support revenue. The stock has come under significant selling pressure due to the prolonged restatement process (I project the company will become a current filer w/ the SEC by mid 2009), which have caused many hedge funds to punt the stock during 2008, in addition to general economic headwinds. Management has stated that the holding company structure is not optimal. Once the company becomes a current filer w/ the SEC, I would expect a sale of non-core assets, such as Ulticom and Starhome, or at a minimum a spin off of the equity ownerships in Verint and Ulticom to existing CMVT shareholders, which would greatly enhance the public float of these two companies. For the purposes of this analysis, I will be focusing on the stand alone operations of Comverse's core CNS business, which provides messaging and billing software to wireline and wireless network providers around the globe.
OVERVIEW OF CNS (COMVERSE NETWORK SYSTEMS)
CNS is a leading provider of telecommunications software, systems and related services for voice and data enhanced services as well as pre-paid and post paid billing solutions. CNS's installed base includes over 500 global communications content and service providers in over 125 countries around the globe. CNS solutions are composed of four primary categories - 1) voicemail solutions; 2) advanced messaging solutions for telecommunication services; 3) enhanced solutions for the management and delivery of data and content-based services (video, email, SMS, etc.); and 4) billing and account management solutions. While voicemail has become a necessity, these enhanced services are ultimately designed to help wireless carriers generate more traffic/usage, increase ARPU, differentiate services and enhance the communication experience for customers.
CNS's flagship application traditionally has been focused on the call answering market, as the company dominates the voicemail market through its flagship Trilogue solution, with the company having more than 50% market share over its nearest competitors such as Alcatel-Lucent, Ericsson, LogicaCMG and Unisys. With a majority of the top-tier carriers as clients, CNS has been able to ride the telecom spending wave over the past few decades. While the carrier voicemail market is mature, carriers still must continue to spend on additional capacity as global subscribers continue to grow. A carrier can only postpone buying additional capacity for three to six months without risking customer disruption (network busy, etc.).
While the company's traditional voicemail platform has been its bread and butter, over the past few years the company has transformed its focus toward the faster-growing wireless data products, IP applications, and converged billing opportunity.
With the CNS division having an oligopoly-like control of the traditional voicemail market, CNS has refocused its energies on the nascent IP market. With consumers and enterprises alike continuing to transition from traditional telephony to IP-centric solutions and services, Comverse has been leveraging its voice presence into this next-generation IP market. CNS's flagship solution is InSight, a single, modular IP-based messaging platform that provides voicemail and a host of enhanced value-added services. InSight offers the ability to integrate data (video and multimedia), network, and smart handset capabilities under one roof. Core components, including the multimedia message store, address book, media and presence servers, and subscriber profile database serve all associated applications, thus providing an attractive single point access to all types of messages and personal files. Value-added services around voicemail such as online access to messages, visual voicemail, forwarding capabilities, email, and multimedia, should provide ample cross-selling and up-selling opportunities as stronger content, faster connections (3G) and enhanced benefits should drive more wireless carriers to adopt beefed-up messaging services. For example, adoption of the InSight platform significantly benefited from the introduction of the iPhone's visual voicemail feature, as carriers around the globe were forced to upgrade their systems in order to remain competitive. With less than a third to a half of Comverse's installed base of carriers on the InSight platform, there should be ample cross-selling and up-selling opportunity on the horizon as carriers must continue to differentiate themselves over competitors with value-added services, particularly as customer appetite for music and video wireless services continues to increase.
Comverse's real-time billing and prepaid solutions deliver dynamic control of telephony services and can manage many millions of active subscriber accounts simultaneously. As such, Converse has the ability to authorize, rate, charge and control voice calls, data sessions and emerging payment transactions in real time. The built-in capability to impose real-time credit limits on accounts reduces the operator's risk when deploying new services. Prepaid billing was originally considered a low-tech option for cost-conscious consumers but has gained acceptance as an intelligent way for consumers to take advantage of the best deals once they become available, as they are not locked into a contract. While prepaid billing solutions are not as widespread in the United States, these solutions are very popular in overseas markets, with prepaid subscribers representing a vast majority of the subscriber base in some European countries and emerging markets, where Comverse has had particularly strong success. Comverse's primary competitors in the billing market are Amdocs, Convergys and Oracle.
Looking forward, Comverse's prepaid/postpaid solutions will enable the company to penetrate the converged billing market, which is slated to become one of the larger segments in the billing market, as Tier 1/2/3 carriers continue to move in the direction of converged billing systems due to the lower costs and clear technology benefits. With content and multimedia delivery becoming increasingly more complex, carriers are ill equipped today to handle the billing needs for many of the enhanced solution sets customers are demanding today.
Source: Brean Murray, Carret & Co. initiation report on June 4, 2008 and Friedman Billings Ramsey initiation report on September 19, 2006
While Comverse has not broken down its revenue stream between recurring and new business, based on a number calls with customers and industry experts, I believe approximately 60% of CNS's revenue is recurring, consisting of maintenance and a 1-1 attach rate for services/consulting work. Another 15-20% of revenue is attached to capacity upgrades within Comverse's installed base of customers, which is largely driven by the market growth rate of global subscribers. A customer has the flexibility to postpone capacity upgrades for one or two quarters, however, beyond that, it risks disrupting quality of service. Approximately 15-20% of Comverse's revenue is related to new sales, which would be the most sensitive to economic downturns. However, Comverse's strong focus on emerging markets should help offset some of the weakness the mature markets are currently facing.
SNAPSHOT OF OTHER BUSINIESSES
Verint Systems provides analytic software for business intelligence, call centers and security. Verint has over 5,000 customers in more than 100 countries, including over 70% of the Fortune 100. Verint was part of Comverse Technology in its early years, with capabilities in PBX-based wiretapping. Over time, the company expanded its communications interception, video surveillance and analytics capabilities. In 2002, Verint was created as a separate public company, with Comverse Technology maintaining majority ownership. The IPO was designed to create shareholder value following the terrorist events of September 11, 2001 and resulting focus on enterprise and government security, including the Homeland Security initiative. Verint has approximately 2,500 employees across 18 countries. Comverse owns 57% of Verint.
Ulticom is a provider of signaling solutions for wireline, wireless and Internet communications. Ulticom's Signalware products are used by equipment manufacturers and communication service providers. The signaling software enables the deployment of enhanced services associated with mobility, messaging, payment, and location-based functionality. Ulticom's business was originally acquired by Comverse Technology in 1995 as a small telecom software programming shop. Ulticom went public through an IPO in 2000, with Comverse maintaining majority ownership. Comverse owns 69% of Ulticom.
Starhome B.V. provides software to mobile network operators that facilitate mobile device functionality during roaming. Starhome was created internally as a part of Comverse Technology. Comverse owns 70% of Starhome.
Source: Brean Murray, Carret & Co. initiation report on June 4, 2008
TIMELINE OF EVENTS
MARCH 2006 - Comverse announces creation of a Special Committee of the Board to review stock option grant practices. Postpones filing of FY05 (January 2006 year end) earnings pending review and potential restatement of historical earnings.
APRIL 2006 - Special Committee recommends forced resignation of Kobi Alexander (Chairman & CEO), David Kreinberg (CFO), and William Sorin (General Counsel).
MAY 2006 - Comverse announce changes to senior management team and Board of Directors. Roz Alon, an independent director, was named interim CEO; Avi Aronovits, VP of Finance and Treasurer, was named interim CFO; Paul Robinson, VP Legal and General Counsel, was named Executive VP, Chief Administrative Officer, General Counsel and Corporate Secretary.
JULY 2006 - Kobi Alexander was charged by the US Department of Justice with multiple charges of conspiracy to commit various types of fraud and other related offenses relating to the timing of Comverse's stock option grants.
AUGUST 2006 - SEC files civil injunctive action against Kobi Alexander, David Kreinberg and William Sorrin. Comverse severs these former executives connections to the company, rescinds all unexercised options, and invalidates any other securities granted to them.
NOVEMBER 2006 - Five new independent directors elected to Comverse board. In connection with the ongoing investigation, Comverse identifies errors in revenue recognition, misclassification of certain expenses, and stock option grant irregularities.
APRIL 2007 - Andre Dahan named President and CEO of Comverse.
SEPTEMBER 2007 - Comverse announces preliminary revenue and income from operations results for 2QFY07 (quarter ended July 31, 2007) and provides updated backlog and balance sheet information. Comverse also reiterates that it still expects to become a current filer with the SEC by the end of FY07 (January 31, 2008).
NOVEMBER 2007 - Comverse announces an expected delay in becoming a current filer w/ the SEC due to discovery of inconsistent revenue recognition practices associated with VSOE (vendor specific objective evidence) accounting standards. The Company stated that the software revenue recognition issues will likely only impact the timing of revenue recognition (license revenue recognized upfront vs. maintenance revenue recognized over the life of a contract), rather than calling into question the validity of the transactions or revenue streams.
JANUARY 2008 - Kobi Alexander files a $72 million lawsuit against Cmverse for severance, unexercised stock options and bonus pay.
JANUARY 2008 - Comverse announces completion of the Special Committee investigation which confirmed the existence of option backdating and earnings manipulation. Remedial measures were put in place to address these issues, including enhancing corporate governance, internal controls, training and compliance.
MARCH 2008 - Comverse receives a "Wells Notice" from the SEC due to past stock option grant practices and certain unrelated accounting matters. The Wells Notice provided notification that the SEC staff intends to recommend that the SEC bring a civil action law suite against Comverse due to alleged violations of US securities law.
APRIL 2008 - Comverse files an 8K stating that Ulticom is in the process of considering a sale of its business by merger or otherwise to unaffiliated third parties.
JUNE 2008 - Comverse names Joseph Chinnici as CFO and John Spirtos as SVP, Corporate Development & Strategy. Mr. Chinnici previously served as CFO of Ciena Corporation and Mr. Spirtos previously served as SVP, Corporate Development at Neustar and as President of Broadwing Communications.
AUGUST 2008 - Comverse files an 8K which incorporates a letter sent to employees from CEO, Andre Dahan addressing progress on the realignment introduced in January 2008 and a business update, which indicates slowing momentum in the second quarter due to underperformance at Netcentrex, delayed decision making in the core business, and a large, unfavorable move in the Israeli Shekel exchange rate vs. the US dollar. Due to the complexity surrounding the VSOE revenue recognition process, Comverse is unlikely to meet its internal target to be a current filer by the fall of 2008.
OCTOBER 2008 - Comverse files an 8K which discloses consolidated cash and debt information as of July 31, 2008. Comverse also announces that during the 12 month period ended July 31, 2008, the company incurred $75 million in connection with investigations by the Special Committee and other accounting matters related to the restatement. Despite this, Comverse still managed to grow its cash and cash equivalents balance to $1.5 billion vs. the $1.43 billion reported as of July 31, 2007.
NOVEMBER 2008 - Kobi Alexander wins a Namibian court bid to postpone an extradition hearing until March 4, 2009.
DECEMBER 2008 - Ulticom files an 8K which discloses updated cash and cash equivalents balance as of October 31, 2008. Ulticom had cash and cash equivalents of $283m vs. $285m at October 31, 2007 and $282m at July 31, 2008. Ulticom had no long-term debt outstanding.
Source: Company filings and Brean Murray, Carret & Co. initiation report on June 4, 2008.
Comverse Technology, Inc. (CMVT) is a holding company consisting of Comverse, Inc, a wholly owned subsidiary which houses the company's core CNS business (messaging and billing), 57% ownership of VRNT, 69% ownership of ULCM, and 70% ownership of Starhome. Management has stated that the holding company structure is not optimal. Once the company becomes a current filer w/ the SEC, I would expect a sale of non-core assets, such as Ulticom and Starhome, or at a minimum a spin off of the equity ownerships in Verint and Ulticom to existing CMVT shareholders, which would greatly enhance the public float of these two companies.
I calculate the enterprise value of the core CNS business as follows:
|Current Price - CMVT||$ 6.32|
|Market Cap.||$ 1,321|
|Plus: Debt||$ 420||Convertible debt, puttable to company May 2009|
|Less: Consolidated Cash||$ (1,300)||As of July 31, 2008 as disclosed in 8K filed on 10/21/08|
|Less: ARS at 80% of face||$ (160)||As of July 31, 2008 as disclosed in 8K filed on 10/21/08|
|Plus: Cash at Verint||$ 127||As of Oct. 31, 2005, adjusted for $40m of debt paydown discolsed in 8K filed on 9/10/07|
|Plus: Cash at Ulticom||$ 283||As of Oct. 31, 2008 as disclosed in 8K filed on 12/11/08|
|Less: Verint Convertible Preferred||$ (293)||CMVT purchased preferred stock in Verint to help fund acquisition of Witness|
|Less: Value of VRNT stock||$ (119)||based on market price... CMVT owns 57% of VRNT|
|Less: Value of ULCM stock||$ (173)||based on market price... CMVT owns 69% of ULCM|
|EV of CNS Business Unit||$ 106|
|Plus: Future Lawsuits / Settlements||$ 175||Use Mercury Interactive, Broadcom and Brocade class-action lawsuit settlements as proxy|
|Mercury Interactive settled for $146m|
|Adjusted EV of CNS Business Unit||$ 281||Broadcom settled for $150m|
|Broacde settled for $160m|
Below are my projections for the stand alone CNS business:
|FY Ends in January of the following year - i.e. FY08 ends in Jan. 2009|
|Total CNS Revenue||825||1,149||1,207||1,207||1,207||1,267||1,330|
|Estimated Gross Margin||60.0%||56.0%||54.0%||56.0%||58.0%||60.0%||60.0%|
|Allocated SG&A + R&D||(425)||(563)||(573)||(579)||(591)||(608)||(612)|
|% of Revenue||52%||49%||48%||48%||49%||48%||46%|
|Estimated Operating Margin||8.5%||7.0%||6.5%||8.0%||9.0%||12.0%||14.0%|
|Less: CNS CapEx||(35)||(40)||(40)||(40)||(40)||(40)||(40)|
|Unlevered Free Cash Flow||61||77||76||90||100||134||162|
The last piece of income statement data that we have is from the 8K report Comverse filed on September 10, 2007. According to the filing, for the three and six months ended July 31, 2007, CNS generated revenue of $288m and $572m, respectively. The company also reported a significant sequential increase in product bookings, which leaves me comfortable in my FY07 revenue projection of $1.2b. Non-GAAP operating margin improved from 3.0% in 1Q07 to 6.7% in 2Q07 and the release stated that "Comverse is on track to achieve its near-term objective of achieving double-digit adjusted (non-GAAP) operating margin, and we believe this goal will be reached over the next couple of quarters." I believe the company did manage to exit the F4Q07 (January 2008) with operating margins of 10%+, but have since taken a step back due to the slowing business momentum and unfavorable movement in foreign exchange rates highlighted in the company's 8K release on August 14, 2008.
To sanity check my free cash flow estimates above, we can analyze the change in the company's cash and cash equivalents balance between July 31, 2008 and July 31, 2007, which the company released in an 8K release on October 21, 2008. During this time period, Comverse managed to increase its cash and cash equivalents balance by approximately $70m, despite having incurred expenses of $75m in connection with the Special Committee investigation and the ongoing restatement process. Based on the 8K that Ulticom released on December 11, 2008, we know that Ulticom's cash balance was relatively unchanged. Given the relatively high leverage on Verint due to the acquisition of Witness, it is unlikely that Verint's cash balance has increased significantly. Therefore, it appears that the $145m increase in cash ($70m + $75m of special charges) over the past year can largely be attributed to the CNS division. As such, I believe there is ample cushion in my $100m free cash flow estimate for FY09.
Incorporating $175m of class-action law suit settlements into my enterprise value for the CNS division, based on CMVT's current share price and a 9% operating margin assumption, CNS is trading at 1.9x FY09 EBITDA and offers a 32% free cash flow yield. This is an incredibly cheap price to pay for one of the market leaders in the large and growing global telecommunications market, with a large installed base of customers (that face very high switching costs, think heart surgery) which provide a reliable and growing stream of recurring maintenance, service and support revenue.
There is also ample room for margin expansion as the company believes it can achieve mid to high teens operating margin in the medium term. Given the larger mix of high-margin software revenue vs. competitors such as Amdocs, there is potential for operating margins to exceed 20% in the long run. Comverse's strong competitive positioning in emerging markets should allow it to grow its business much faster than the mid-single-digit industry average. I am conservatively projecting that operating margins improve to 12% in FY10 and 14% in FY11 based on revenue growth of 5% in each year. Applying a 6x - 8x EBITDA multiple range to my FY11 estimate, I get to a target price in the range of $12 - $14 after penalizing the company's net cash calculation for a $175m class action lawsuit settlement (~$4.80 per share of net cash post adjustment).
|FY11 CNS EBITDA||$ 239||$ 239|
|Value of CNS Business Unit||$ 1,434||$ 1,912|
|Less: Debt||$ (420)||$ (420)|
|Plus: Consolidated Cash||$ 1,300||$ 1,300|
|Plus: ARS at 80% of face||$ 160||$ 160|
|Less: Cash at Verint||$ (127)||$ (127)|
|Less: Cash at Ulticom||$ (283)||$ (283)|
|Plus: Verint Convertible Preferred||$ 293||$ 293|
|Plus: Value of VRNT stock||$ 119||$ 119|
|Plus: Value of ULCM stock||$ 173||$ 173|
|EV of CNS Business Unit||$ 2,649||$ 3,127|
|Less: Future Lawsuits / Settlements||$ (175)||$ (175)|
|Adjusted EV of CNS Business Unit||$ 2,474||$ 2,952|
|Target Price Range||$ 12||$ 14|
Due to its large and sticky installed base at many large carriers around the globe (AT&T, O2, Orange, British Telecom, Sprint Nextel, Alltel, Verizon, etc.) and strong converged billing platform, I believe that CNS is a very attractive acquisition target for a number of strategic buyers such as Amdocs, IBM and Oracle.
Getting current w/ filings will renew interest in the company and allow for sale of the company to proceed...
|Entry||02/02/2009 12:47 PM|
Thanks for the writeup.
1) VRNT convertible is behind $610m of bank debt and I think is trading well off par. Do you think the convert is worth the full $293m and, if so, what VRNT earnings multiples do you base that off?
2) Have you had the chance to speak with Dahan at all? Do you know what his financial incentives? Does he seem eager to break this up ASAP?
3) Comverse is one of those companies where I read the business description five times and still don't really understand what they do. They try to sell the "high-margin services/oligopoly" line, but from what I can tell, CNS has never really made any money, and even the 3% and 6.7% EBIT margins in early 2007 included lots of stock-comp and other charges that you should arguably add-back, at which point they barely broke even. If it is such a good busines, why haven't they made money historically?
4) Does Comverse's "moat" with Traditional Voicemail extend to IP Solutions, or is the latter market more competitive? Are IP Solutions going to take significant market share in the industry in the next few years?
5) Given that the telecom equipment industry (including most of the comps you named) have been hit very hard lately, why do you think revenues will be flat in 2009 and up 5% in 2010, with corresponding operating margin increases?
|Entry||02/02/2009 03:55 PM|
Thanks for the questions.
1) I believe that VRNT's senior debt trading below par is more of a reflection of illiquidity in the fixed income market vs. company specific problems or value impairment. Verint's business should hold up relatively well during the downturn as their enterprise customer monitoring and analysis technology offers a high value proposition for end users through improvements in customer satisfaction, customer retention, and productivity (catch problems early). Maintaining customers and improving employee productivity are two critical areas that I feel companies will continue to invest in, despite the tough economic climate. The other 40% or so of Verint's business is government related, and tied to homeland security budgets, which I would also expect to hold up. At $720m in estimated '09 revenue, a 15% operating margin, and $20m add back for D&A, I estimate the company will generate approximately $125m of EBITDA. Using NICE's current, albeit arguably depressed, '09 EV/EBITDA multiple of 6.5x as a comp (vs. historic range of 10-12x), you get to an EV of $800m+, which covers the approximately $500m in net debt, and $293m convert. Given the amount of cash CMVT has on its balance sheet, I am not worried about Verint defaulting on its debt, which has covenants that step down in January 2009 (from 5.5x to 4.5x) since CMVT can always infuse Verint with cash, which will adjust the net debt part of the equation into compliance.
2) I believe that Dahan is compensated on opearting margin and cash flow metrics as well as getting the company back on file (which he is very behind schedule on). I beleive he is very focused on maximizing shareholder value. He has publicly stated that the current CMVT holding company structure is not optimal, which I read as Ulticom and Verint will likely be sold off. Whether Dahan ultimately wants to sell CNS, I am a little less clear on, but I believe he and the board will act in the best interest of shareholders, particularly given that two large shareholders (Porter Orlin and Oliver Press) have seats on the board.
3) Under the old management team, CNS was not run very efficiently or ethically, to say the least. Over the past two years, Dahan's priority has been to add serious operational discipline into the company, and to improve operating margins significantly. Given Comverse's high software revenue mix (~75%) vs. Amdoc's largely service based revenue, Comverse's operating margins should have ample room to exceed the mid teems operating margin enjoyed by competitors such as Amdocs or Convergys. Dahan had previously stated that his goal was to exit 2007 w/ a double digit operating margin. We believe he achieved this, as Dahan did receive a full bonus, which was approved by the Board of Directors (see 8-k text below). Margins may have taken a slight step back due to the weaker economy, but I do try to take that into account in my model.
FROM 8-K filed on April 9, 2008:
The Board of Directors approved a total bonus payout to Mr. Dahan for Fiscal 2007 in the amount of $1,787,000. In addition, the Board of Directors approved the grant of deferred stock units under the Company's 2005 Stock IncentiveCompensation Plan to Mr. Dahan of 318,472 units. Each deferred stock unit represents the right to receive one share of common stock, $0.01 par value per share, of the Company ("Common Stock"). One- third (1/3) of the units granted shall vest on each of April 3, 2009, April 3, 2010 and April 3, 2011, subject to accelerated vesting under certain circumstances. In respect of Fiscal 2008, the salary and bonus opportunity for Mr. Dahan were unchanged. The payment to Mr. Dahan of an on target bonus for Fiscal 2008 will depend on the Company's financial performance, based on annual revenue, operating income and cash flow targets and individual performance, with 70% of the bonus payout based on the Company's financial performance and 30% of the bonus payout based on individual performance.
4) Comverse has been quite successful in upgraded its traditional Trilogue Voicemail customer base to its new IP-based Insight platform over the past few years. Apple's IPhone skyrocketed the popularity of the visual voicemail feature, and Comverse has benefited from this by winning a majority of the visual voicemail deployments on a global basis. I have not picked up on any significant increase in the competitive environment between Trilogue and Insight, but I will look into it.
5) I anticipate that Comverse's revenue streams will be somewhat resilient due to its strong presence in emerging markets (roll out of greenfield wireless service in places like Russia, E.Europe, India, continue), continued global subscriber growth (subscribers should still grow in the low to mid single digits), particularly in emerging markets, as well as new visual voicemail deployments. While Amdocs and Convergys are both experiencing headwinds, I would point out that they have significant exposure to mature markets, and a lot of their revenue comes from the service line, which is the first to get cut in a downturn.
Hope this was helpful...
|Subject||RE: RE: questions|
|Entry||02/02/2009 04:52 PM|
I appreciate the prompt and thorough response.
I think your estimates for VRNT are extremely aggressive. NICE is a much better business and company (higher market shares in niche busineses), and it has never been anywhere near 15% EBIT margins. Looking at historical VRNT and Witness Systems, they haven't been clsoe to 15% margins either. I think mid-to-high-single digit EBIT margins is more realistic for VRNT at best, which makes the convert valuation at par a very iffy assumption. Bank debt having traded at $0.50 is a data point that supports this.
Along those lines, I am much more skeptical of what management calls its "adjusted operating margin" vs. actual operating margin. There were $375m of adjustments from 2005 to mid-2007. Sure, a lot of that is cleaning up the legacy garbage, but when you are dealing with pretty low EBIT margin assumptions to begin with, that is highly material.
My question regarding competitive landscape is whether selling IP-based sysetms is going to be as profitable as the legacy systems. My caveman understanding of how this all works is that an IP-based system will be cheaper, easier to install and maintain and, I would guess, less profitable. Do you know a good information source to learn about this visual voicemail business and to track customer wins?
I agree that there some interesting assets here. Downside seems to be limited and there could be a pleasant upside surprise (sale to Amdocs?). Plus, many investors have probably just given up. But the above points, plus the fact that Amdocs and Convergys' billing segment are showing visibile deterioration, makes me think your valuations are high.
|Subject||RE: RE: RE: questions|
|Entry||02/02/2009 06:15 PM|
Thanks for the follow on questions... great dialogue...
If I remember correctly, when Verint reported 1Q07 (April) earnings back in mid 2007 management anticipated operating margins of approximately 20% going into FY08 based on synergies from the Witness acquisition and some top line growth... I believe the synergies w/ Witness were achievable given the overlapping nature of their business, and that layoffs happend just a day or two after the close of the integration. I agree, top line growth will be impacted from the weak economy, but I think management should be able to manage the business to a 15% operating margin, particularly after Verint and Witness technology platforms have been merged into a common platform, which should yield additional R&D synergies...
With regards to adjusted operating margin, I agree there is a lot of noise in the numbers, but I would point you back to the cash flow data that we do have for the one year period from July '07 to July '08 which clearly demonstrates that the company has been generating ample cash from its core CNS business. I would also sync this up w/ Dahan's bonus payment, which the board had to approve based on performance metrics. Given this information, I feel somewhat comfortable with being able to back into a operating margin figures that I use... With no real financials, I agree, its tough to get a lot of comfort, but I think I have enough evidence that get's me in the right ballpark to take a stab at what I believe to be a legitimate, cash flow positive, sticky business for under 2x EBITDA assuming $175m in fines.
Sites like totaltele.com do a good job of keeping track of the industry and new deployments/contract wins by Comverse and other industry players. You will also see notices of visual voicemain wins by Comverse. You should also follow up w/ the CMVT's IR, who should be able to talk generally about visual voice mail wins.
With regards to IP platform, I agree that it is a much lower TCO for the carriers, and could result in lower capacity spend w/ Comverse. However, on the other side of this is Comverse's ability to sell new revenue generating products into the IP customer base (ring back tones, mobile voting, mobile advertising, etc), which should hopefully lead to larger total spend by the carriers. I think Amdocs would be a logical buyer for CMVT as it would give them a large footprint in emerging markets, which they are currently largely absent from today. I'm less worried about the weakness Amdocs and Convergys is seeing because of their exposure to large players in mature markets with a lot of the revenue being somewhat discretionary service driven - i.e. convincing large carriers to start a new Amdocs led project to migrate or upgrade legacy systems, which can be easily pushed off during tougher economic times.
|Entry||03/16/2009 11:13 AM|
Any thoughts on today's 8-k?
1) Cash down from $1.5b to $1.3b.
2) Impact of internal bribery investigation?
|Entry||03/16/2009 11:54 AM|
Looking at it again, I realize that I misread the filing, and it appears cash did not change.
|Subject||RE: CFO departure|
|Entry||06/19/2009 10:46 AM|
Sorry for my absence from the board, been a bit busy lately... re: 8-k cash balance, you are correct, it did not change, they just changed the wording around the ARS and excluded it from "cash"... I hear that Dahan and Chinnici did not agree on certain things and that caused a bit of friction... new CFO is much better in my opinion given CMVT's unique situation (i.e. getting current w/ SEC filings)... on the business front, they are not immune from the macro storm that's hitting the global economy, but I'd expect revenues to bounce back faster than most companies given pent up demand... carriers can postpone capex for only so long... voice, data and new subscriber growth continue to grow, and that will put increasing pressure on network capacity...