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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