Written by: Zack Miller | July 9, 2007
Innovator of data-capture solutions, Top Image Systems (TISA) announced today a strategic acquisition of leading EDM provider in Asia Pacific, Asiasoft. The 51% purchase of Asiasoft gives TISA an accretive acquisition that gets them to a $30MM revenue-per-year mark that the company set as a benchmark for investors earlier this year.
Interesting, if not a little too rah-rah, interview with IncrediMail’s (MAIL) founders. Interesting to hear about their marketing and M&A strategy and replete with the requisite cheerleading. “We’re now in the stages of growth and the company’s market cap does not reflect its potential at all,” insists founder, Ofer Adler.
Just in case, US managers were feeling lonely, Israel also has its share of corporate largess. The Marker has the story about outgoing Israel Corp CEO’s large parachute. That’ll buy some falafel.
UBS getting bullish on the shekel/dollar exchange.
Good read on Veraz (VRAZ) post-IPO and getting down to business. Read about the company’s take on the future of Voice Over IP (VOIP).
Written by: Zack Miller | July 8, 2007
Zack Miller
www.IsraelNewsletter.com
When creating Israel Newsletter and our Investment Advisory business, American Israel Investment Associates, we were infrequently met with skepticism about focusing solely on Israel. This wasn’t the real cynical kind of skepticism, but a good question was raised that any asset manager should be able to address aptly: why focus on Israel?
Or better put, US-traded Israeli companies tend to skew heavily towards technology and as we all know, technology companies operate beyond geographical boundaries and these types of companies are essentially independent of their local markets. Not true so much for a domestic Chinese life insurer who sells policies into a large local market but partly true for Israeli software/hardware companies that are primarily export driven.
Well, we feel we’ve answered these question sufficiently for our readers and investors who are voting with their support for our value-driven, on-the-ground analysis of Israeli companies; but for those who linger on the fences, we decided to publish some of our work on probably the two most interesting domestic plays in our universe: the two largest Israeli cellular operators, Cellcom (CEL) and Partner Communications (PTNR).
Let’s first profile Cellcom before we benchmark it against Partner.
Strategy
- Maximize customer satisfaction, retention and ARPU (average revenue per user) growth
- grow content and data revs
- strengthen the Cellcom brand
- improve net income by controlling while keeping service levels at acceptable levels
Israeli Wireless Market
- Mature: not a lot of room for increased penetration (wireless penetration stands at 120%)
- Slow Growth: Growing around 5% this year
- Competetive: 4 cellular operators: Cellcom 2.9MM customers and 34% market share but adding estimated 48% of net market additions in 2006. Other competitors include Partner (PTNR), Pelephone and MIRS.
Put all this through the analysis blender and this is a story about ARPU growth — plain and simple.
Data Revenue Growth Potential
We believe that this is the main driver for cellular market growth in Israel. Israel sits in the relative middle in terms of data ARPU as a percentage of overall ARPU when compared to other countries.
Merrill Lynch analysts attribute Israel’s low data usage to the country’s high voice usage — precluding SMS usage. Merrill uses the Monthly Per Capita Usage metric (that is, monthly operating usage times penetration) and Israel scores really high: the 3rd highest of all 53 countries tracked.
Regulatory Challenges/Opportunities
There are 4 regulatory challenges affecting the Israeli cellular industry:
- Ongoing interconnect cuts: Rates were recently cut 10% in March of 2007 and will move to 15% next year. While creating margin and ARPU pressure, the cellular industry has been relatively successful in passing on this cost to the user in the forms of tariffs.
- Introduction of Voicemail notification: The Israeli regulator introduced an option for callers to voicemails to hang up within the first three seconds of a call without being charged. Cellcom warned that this would affect revenues negatively to the tune of 1.2% and EBITDA 3.2% for 2007. Again, it’s probably likely that rising tariffs and data usage offset this negative impact.
- Mobile Number Portability (MNP): Due to be implemented in the second half 2007 (although no firm date has been announced), this could theoretically compel Cellcom’s competitors to boost SAC (subscriber acquisition costs) to capitalize on lower barriers to switching. We don’t see any indication that any cellular operators plan to break rank and ratchet things up.
- Potential MVNOs (Mobile Virtual Network Operators): MVNOs do not exist in Israel today. The government has said that it is interested in allowing creation of these entities and 20% return on invested capital will probably spell that cable operator HOT gets into the game, further pressuring prices.
So, let’s pit Cellcom head-to-head with Partner and see where that takes us.
Growth: Cellcom’s move into 3G came almost a full year after Partner’s. By default, data revenues for Cellcom have taken longer to ramp up and consequently, contribution from new sources of revenue (ie, data) presage to be higher for Cellcom than for Partner. Merrill estimates that Cellcom will post 6.3% sales growth compared to Partner’s 5%.
Dividend Policy: Partner’s dividend policy is to pay out at least 40% of net earnings while Cellcom pays out 95%. Partner will probably have to parry for Q2 to meet similar payout.
Balance Sheet: Cellcom’s owners already paid out a significant dividend pre-IPO and we expect Partner to probably issue something similar. At the end of 2006, Partner had net debt/EBITDA of 1.2x compared to Cellcom’s 1.6x.
In sum, it looks like both business share similar balance sheet profiles and exposure to new growth opportunities. Yet, Cellcom trades at a 6% EV premium. Given such similarities of two companies competing in the same market, investors need to ask themselves if Cellcom’s premium is warranted.
Perhaps it’s not — perhaps it’s the after-effect of trading dynamics when an Israeli company dually lists in Israel and the US (see our analysis of this effect here). I dunno — but a pair trade (long Partner and short Cellcom looks pretty interesting right here into the summer.
***
Zack Miller is the lead equity analyst for America Israel Investment Associates, LLC. and a former equity analyst for a leading multinational hedge fund. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email zack@profile-financial.com
Written by: Zack Miller | July 8, 2007
Video services company, Optibase (OBAS), said on Friday that it began a tender offer for about 5% of the shares of Scopus Video Networks (SCOP). Following the tender (made about 6% above market price), Optibase’s would raise its stake in Scopus to almost 28%.
Israel defense contractor Elbit Systems (ESLT) announced on Thursday that a subsidiary, Tadiran, received a $85MM communications equipment contract from a European customer.
Partner Communications (PTNR) is served a lawsuit requesting certification as a class action, alleging that Israel’s second-largest mobile phone operator over-billed one million subscribers. The lawsuit, if certified as a class action, can potentially seek 1.5 billion shekels, or about $357MM.
LightReading out on the test-and-measurement sector’s unpredictability. While Radcom (RDCM) is having a disappointing 2007 (see IsraelNewsletter’s coverage on RDCM’s woes), Canadian test vendor, EXFO (EXFO) is on a roll. Its stock is up over 27% in 2007 off of beating expectations and record bookings.
Tel Aviv Court to hear Templeton-Taro case in September. Franklin Templeton (BEN) has filed a petition against the acquisition of Taro (TARO.pk) by India’s Sun Pharmaceuticals. Templeton owns a 9.5% stake in Taro and alleges that Taro’s management was pushing Taro into insolvency and trampling the rights of minority shareholders in order to sell the company.
Written by: Israel Investor Newsletter | July 6, 2007
Douglas Goldstein, CFP
www.IsraelNewsletter.com
By announcing a definitive agreement to acquire Actimize, NICE Systems is pioneering convergence of Real-Time transaction and interaction analytics solutions. They will become the world’s first company to offer a cross-channel solution for enterprises analyzing data from contact centers, electronic transactions, web, emails, market data, and more. NICE believes this alliance will help them leverage their leadership in financial services contact centers and trading floors, and they expect the deal to contribute $55 to $60 million non-GAAP revenues in 2008.
As a leader in the financial services market, NICE solutions today capture and analyze hundreds of millions of voice, web, email and other interactions daily, at customers including the world’s top banks, brokerages, and thousands of financial institutions worldwide, which seek to improve compliance, enterprise performance, and customer loyalty. Actimize solutions are analyzing today close to one billion transactions daily at the world’s top banks and brokerage firms, which are seeking to improve compliance, fraud prevention, and anti-money laundering. Leveraging on these synergies, NICE and Actimize will focus initially on the financial services industry to offer the first solution in the world which provides real-time transaction and interaction analytics.
NICE has always looked to generate powerful synergies. In fact, their partners include IBM, Siemens (SI), Cisco (CSCO), Microsoft (MSFT), Intel (INTC), and an ongoing list of the world’s biggest players.
With an ever-increasing concern in the financial markets about fraud, money laundering, and brokerage compliance, the business of Actimize has been growing strongly. Pairing that with NICE’s 32% year-over-year quarterly revenue growth and $400+ million annual revenue stream, the deal looks picture perfect. The stock is now trading about 10% off its all-time high of about 40. The excitement of this news was already getting built into the stock price a few weeks ago when rumors started spreading about the deal. So don’t look to get in to make a quick buck. If you see the future of this industry for all its great potential, though, owning a few shares of this company could make a real nice addition to your long-term portfolio.
Disclosure: Author’s fund is currently long NICE as of 7/5/07, but does not own any of the other companies listed herein.
Please see our Disclaimer HERE.
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Douglas Goldstein is the Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email doug@profile-financial.com.
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