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Analyst reports: Wall Street lauds phone systems firm Comverse

Analysts praise Comverse Technology a day after the phone-messaging systems provider beat Wall Street expectations with a 46 percent gain in third-quarter profit.

    Analysts praised Comverse Technology on Wednesday, a day after the phone-messaging systems provider beat Wall Street expectations with a 46 percent gain in third-quarter profit.

    Strong demand for products used in wireless telecommunications networks boosted the Woodbury, N.Y.-based company's net income to $64.4 million, or 35 cents a share, in the quarter ended Oct. 31. The company's net income was $44 million, or 27 cents a share, in the same period last year.

    Excluding costs from recent acquisitions, Comverse would have earned $68.4 million, or 38 cents a share--about 2 cents more than the most bullish analysts had expected.

    Comverse designs and manufactures hardware and software for multimedia applications. More than 350 fixed and wireless telephone network operators, government agencies, call centers, financial institutions and other clients use Comverse products to deliver voice mail, short text messages, prepaid phone calls and other services. A majority of sales come from wireless carriers, Comverse said.

    Fiscal third-quarter sales rose 37 percent to $318 million from $232.9 million. Gross margins, a key measure of efficiency, were a stunning 62.6 percent, squeaking past the 62.3 percent that analysts had anticipated.

    The results impressed analysts, who raved about the company's "excellent" performance and "stellar growth." The only major concern among analysts involved a broader economic slowdown in North America, Europe or Asia.

    CIBC World Markets, U.S. Bancorp Piper Jaffray, Ladenburg Thalmann and Chase Hambrecht & Quist reiterated "strong buy" ratings Wednesday. C.E. Unterberg Towbin reiterated a "buy" rating, and Salomon Smith Barney maintained its "outperform" rating.

    Comverse shares closed at $95.50, down $3.50 from their closing price Tuesday.

    "We continue to recommend Comverse as a core tech holding," UBS Warburg analyst Jonathan Half wrote in a research note issued Wednesday. He reiterated his "buy" rating and 12-month target price of $130 per share. "In our opinion, there are relatively few companies with such a dominant market share facing similar opportunities."

    Lehman Brothers analyst Tim Luke praised Comverse for "beating expectations across all key metrics." He kept his 12-month target price at $140 but raised revenue and earnings per share expectations and reiterated its highest "1 buy" rating.

    "We believe Comverse will continue to build on its strength in wireless data through additional acquisitions and strategic investments," Luke wrote in a research note issued Wednesday. "To date, through a series of recent deals including Exalink and others, Comverse has invested in some of the latest and most innovative wireless data technologies on the market, which should continue to enhance Comverse's positioning.

    "We remain encouraged by Comverse's expanding customer list and the company's impressive order momentum."

    Goldman Sachs analyst Elan Zivotofsky dismissed pessimists with a bullish research report.

    "Contrary to recent concerns that Comverse is not a strong competitor in the emerging market for wireless data applications, the company continues to experience very strong growth in this important new area," Zivotofsky wrote. "Comverse continues to gain traction in the market for high value-added data products including SMS, WAP-based services, voice-activated services, unified messaging and 'push'-based Web-messaging services.

    "In our view, Comverse's large and entrenched customer base represents a huge new business opportunity as carriers begin to layer on new, wireless data services to their existing voice-messaging platforms," Zivotofsky wrote.