Comptel CTL1V.FH
December 07, 2012 - 2:00pm EST by
cobia72
2012 2013
Price: 0.40 EPS $0.01 $0.05
Shares Out. (in M): 107 P/E 33.0x 7.7x
Market Cap (in $M): 52 P/FCF 18.8x 5.6x
Net Debt (in $M): 1 EBIT 3 10
TEV ($): 53 TEV/EBIT 18.8x 5.6x

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  • Software
  • Finland
  • Turnaround
  • Potential Acquisition Target
 

Description

Comptel is one of the cheapest software stocks around these days, and is in the midst of a turnaround that should leave it with healthy revenue growth and improved EBIT margins.  The company, based and traded in Finland, is a long time player in the OSS (Operations Systems and Support) software market.  Its software packages are sold to telecom service providers worldwide, usually in perpetual license contracts.  Comptel is a small player in this market which is dominated by larger firms such as Amdocs, IBM, Ericsson, and Oracle.  The OSS market is not monolithic but rather is made up of a variety of different sub-markets, in which each of the players may be stronger or weaker.  Comptel's historic strength has been in the mediation market, where its products take the output of the many hardware devices in the network and convert them into individual call records than can then be rated and processed by billing software.  It has about 20% ot the total installed base in this market, and the market is undergoing a new growth cycle as telco operators consolidate their multiple mediation platforms into a single instance, usually with Comptel.  Over the past two years, Comptel has released new products that should enhance its revenue growth as they gain traction.  The first is a fulfillment suite, that basically processes a customer order for a new service from the initial order to the actual activation of the network devices needed to fulfill that order.  This suite was released earlier this year and the company already has a few wins for it.  The second new product is an analytics product that predicts customer behavior and lets the telco react instantaneously to it.  This is a new concept in the industry and has been gaining a lot of attention for the company.  Comptel's edge in this market is that it controls the data flow at so many service providers with its mediation software, it can mine types of data than no other vendors have access to.
 
As with many other turnarounds, Comptel needed new leadership to set its changes in motion and that came in the form of a new CEO, Juhani Hinikka, who joined the company two years ago from Nokia Siemens.  He is a young, dynamic, and thoughtful leader who has invigorated the employee base at the company.  Most technology turnarounds take a few years to unfold and this one it no different, especially as sales cycles with service providers are very long and the time it takes to develop a new product is long, as well.  The company has been growing bookings and backlog at an accelerated rate since last year and in Q3 this seemed to filter down to the revenue and EBIT lines.  Q4 is typically the strongest for the company so perhaps we will see even more tangible results of the turnaround then. 
 
What is the endgame for a company like Comptel?  An acquisition by a private equity firm or by one of its larger competitors could easily make sense, especially given Comptel's valuation.  I think that both potential acquirers and Comptel want to wait and see how the company's analytics strategy works out before making a major move.  I think the company has survived as a small fish in a big pond for a long time, as well, so it could probably keep on like that if an acquisition did not arise.  The stock was at 1.30 EUR a few years ago and the company is probably better positioned from a product perspective now so there is ample upside to be had going it alone.   
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

Q4 results are probably the next major catalyst for the stock.  Q4 is seasonally the company's strongest quarter and as the turnaround goes along in time, each quarter should look better and better.  Customer win press releases have also move the stock in the past and while they are impossible to predict, they could serve as upside catalysts as well.  Finally, a take out by a larger player is a possibility so that would be a major catalyst, too.
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    Description

    Comptel is one of the cheapest software stocks around these days, and is in the midst of a turnaround that should leave it with healthy revenue growth and improved EBIT margins.  The company, based and traded in Finland, is a long time player in the OSS (Operations Systems and Support) software market.  Its software packages are sold to telecom service providers worldwide, usually in perpetual license contracts.  Comptel is a small player in this market which is dominated by larger firms such as Amdocs, IBM, Ericsson, and Oracle.  The OSS market is not monolithic but rather is made up of a variety of different sub-markets, in which each of the players may be stronger or weaker.  Comptel's historic strength has been in the mediation market, where its products take the output of the many hardware devices in the network and convert them into individual call records than can then be rated and processed by billing software.  It has about 20% ot the total installed base in this market, and the market is undergoing a new growth cycle as telco operators consolidate their multiple mediation platforms into a single instance, usually with Comptel.  Over the past two years, Comptel has released new products that should enhance its revenue growth as they gain traction.  The first is a fulfillment suite, that basically processes a customer order for a new service from the initial order to the actual activation of the network devices needed to fulfill that order.  This suite was released earlier this year and the company already has a few wins for it.  The second new product is an analytics product that predicts customer behavior and lets the telco react instantaneously to it.  This is a new concept in the industry and has been gaining a lot of attention for the company.  Comptel's edge in this market is that it controls the data flow at so many service providers with its mediation software, it can mine types of data than no other vendors have access to.
     
    As with many other turnarounds, Comptel needed new leadership to set its changes in motion and that came in the form of a new CEO, Juhani Hinikka, who joined the company two years ago from Nokia Siemens.  He is a young, dynamic, and thoughtful leader who has invigorated the employee base at the company.  Most technology turnarounds take a few years to unfold and this one it no different, especially as sales cycles with service providers are very long and the time it takes to develop a new product is long, as well.  The company has been growing bookings and backlog at an accelerated rate since last year and in Q3 this seemed to filter down to the revenue and EBIT lines.  Q4 is typically the strongest for the company so perhaps we will see even more tangible results of the turnaround then. 
     
    What is the endgame for a company like Comptel?  An acquisition by a private equity firm or by one of its larger competitors could easily make sense, especially given Comptel's valuation.  I think that both potential acquirers and Comptel want to wait and see how the company's analytics strategy works out before making a major move.  I think the company has survived as a small fish in a big pond for a long time, as well, so it could probably keep on like that if an acquisition did not arise.  The stock was at 1.30 EUR a few years ago and the company is probably better positioned from a product perspective now so there is ample upside to be had going it alone.   
    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

    Q4 results are probably the next major catalyst for the stock.  Q4 is seasonally the company's strongest quarter and as the turnaround goes along in time, each quarter should look better and better.  Customer win press releases have also move the stock in the past and while they are impossible to predict, they could serve as upside catalysts as well.  Finally, a take out by a larger player is a possibility so that would be a major catalyst, too.

    Messages


    Subjectmore detail?
    Entry12/08/2012 11:52 AM
    MemberSpocksBrainX
    fwiw, I've quickly learned that your sparse write-ups almost mask absolutely terrific values, but could you provide a bit more detail here?   For example, most of your ideas seem to have banks on the balance sheet with all the cash they carry, but this one is different.  If this is a software company, where has all the cash gone to?  For example, you write "As with any turnarounds..." - what exactly has been the issue here historically?   Why is it a turnaround in the first place?  Plus, your language that "it could 'probably' keep on like that if an acquisition did not arise" is a wee bit different. 
     
    Oh, and I do realize that you've already posted more than your idea limit this year so this could be considered a freebie but any more detail would be appreciated.  I'm just trying to figure out if I ought to pursue this further (software companies domiciled in Finland aren't my typical thing) and this doesn't seem as clean an idea as, for example, your terrific AFOP or SILC postings.

    SubjectRE: more detail?
    Entry12/10/2012 10:23 AM
    Membercobia72
    On the cash front, Comptel actually sold a business for $25m to Cisco last year and then turned around and immediately made a special dividend for about that amount to shareholders.  Many of my other companies that sell to carriers claim that they need a large cash hoard to convince their customers that they are viable but Comptel doesn't feel that way.  I am comfortable with their balance sheet as they at least close to cashflow neutral now and I am forecasting them to generate cash going forward. 
     
    As for their need to to turn around, the company's products and strategy were getting long in the tooth under previous management resulting in stagnant revenue and declining profits.  The board felt like they needed a new leader to shake things up and I think they did a good job picking Juhani.  Since coming on board, he has engineered the release of a new fulfillment product and a new policy control product and has introduced the analytics strategy which is fairly unique in the industry.
     
    I don't think that small Finnish software companies are anyone's main focus, which is why the valuation of Comptel is so low relative to its revenue and potential earnings.  I would argue the same phenomenon holds true for Silicom and AFOP as well.  Small cap tech is an area where many companies are underfollowed and due to the technological nuances many investors steer clear, creating opportunities for those who do the work and understand the technology in the space. 
     

    SubjectLicense Revenue
    Entry12/14/2012 11:52 AM
    Memberstraw1023
    Two related questions:
     
    - Given that these are perpetual licences, will the license revenue die out if they do not introduce major new versions (I assume upgrades and patches are in perpetual license) or new products?
     
    - What happens if the license revenue does peter out? Is there any value in the maintenance and service of existing software? Or is that effectively sold at cost?
     
    Thanks
     
     

    SubjectRE: License Revenue
    Entry12/17/2012 10:45 AM
    Membercobia72
    I would say these are pretty long tailed products and could continue to sell for a long time after a new version is released.  As with many perpetual license companies, the real money is made on the maintenance contracts which cost the company very little.  You could argue that if someone shut Comptel down and just milked the maintenance, they would get a very nice return on their money.
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