Comverse Technology: Have We Seen the Worst?
Written by: Aaron Katsman | June 12, 2007
By Aaron Katsman
www.IsraelNewsletter.com
No question that last night’s earnings report from Comverse(CMVT.pk) was lousy. In fact as someone who has been trumpeting the stock, especially as an M&A target, to say I was shocked at how soft the numbers were is an understatement. Due to the ongoing option-backdating scandal, the company released un-audited numbers. They actually reported a first quarter 2007 loss from operations on a GAAP basis of $60.4 million, compared with GAAP income from operations of $8.6 million for the first quarter 2006. Comverse certainly wasn’t helped by sector wide slowdown in telecom spending. They did manage to post a YOY 10% increase in revenue.
Andre Dahan, President and Chief Executive Officer of Comverse Technology, Inc. said, “Our 10% revenue growth this quarter was achieved despite two factors: (1) a slowdown in spending across the telecom industry and (2) slower bookings momentum in products and services over the past few quarters at both Comverse, Inc. and Ulticom(ULCM.pk), Inc. This was partially offset by continued strength at our Verint Systems(VRNT.pk) Inc. subsidiary.” It certainly seems to me that Verint is the star performer here, and they are in a strong growth market.
Mr. Dahan confirmed rumors that they plan on letting go 6% of the workforce as part of a streamlining and overall reorganization of the company. The big question for investors is whether this is the last bit of bad news that will come out or are we still somewhere in a dark tunnel? Certainly today’s drop of around 5% is an indication that the market has given up. I on the other hand still stick to what I have mentioned in previous posts that this still makes for a very attractive private equity or M&A play . With over $1.8 billion in cash, a private equity firm could take the company and their subsidiaries private, use the cash to help with the restructure and then after things turnaround, re-IPO them.
With an eye towards the long-term I would use today’s drop as an opportunity to add to or start a new position in the stock. I think that we could see the re-organization succeed and the company work things out with the SEC, and then we could start seeing the real value of the company.
Disclosure: Author’s fund is long CMVT.pk and VRNT.pk as of 6/12/07. He does not hold positions in the other companies listed.
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Aaron Katsman is the lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.
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