Comverse slides despite solid quarter

3 min read

Analysts offered two takes on Comverse Technologies's most recent quarter; investors opted to go with the glass that looked half empty.

The company reported what looked like a stellar fourth quarter Tuesday night, continuing its amazing track record. Comverse Technology (Nasdaq: CMVT) has beat the Street's estimates for 27 consecutive quarters.

Comverse's revenue and earnings numbers topped estimates. It reported earnings of 41 cents a share, an increase of 32 percent year over year. Revenues grew 37 percent to $346.6 million from $252.1 million in 1999's fourth quarter. Fueling the growth was Comverse's Network Systems (CNS), which accounted for 84 percent of total revenue. More than 20 percent of that $291 million CNS brought in was from the company's newer, next generation services, a sign that business is on the right track.

But shares in Comverse, a vendor of systems for call centers and enhanced telecommunications services, fell $6.38, or 9 percent, to $63.63 Wednesday after an analyst took the company's mediocre revision to expectations as a bad sign.

Goldman Sachs analyst Elan Zivotofsky was harshest on the stock, banishing it from Goldman's "recommended list" Wednesday, and rating it "market outperformer." He cited "concerns in light of management's guidance."

During a conference call with analysts, Comverse management raised revenue guidance for calendar 2001 from $1.50 billion to $1.52 billion. That comes in below First Call's expected revenue of $1.69 billion. It raised earnings projections by a penny to $1.78, on target with First Call's number.

Zivotofsky praised the company's fourth-quarter performance, and 9 percent sequential growth given the tough environment, but said its new projections just didn't stack up well enough to past performance.

According to Comverse, Zivotofsky wrote in a research note, "the tone of business remains strong; however, management expressed some caution due to the current macroeconomic environment and raised (earnings per share) guidance for 2001 by only (1 cent), a significantly lower magnitude than historically."

Zivotofsky said the stock's current valuation had an expectation for a higher revision to estimates built in, and share price could therefore suffer in the near to medium term.

At the other end of the spectrum was C.E. Unterberg Towbin analyst Herb Tinger, who raised his rating on the stock from "buy" to "strong buy" and maintained a 12-month price target of $125.

He praised the acceleration of revenue and backlog--revenue rose 9 percent sequentially and 37.5 percent year-over-year, while backlog increased 9 percent sequentially and 41.9 percent respectively to a record $319.9 million.

"Comverse remains extremely well positioned to capitalize on the wireless enhanced services and wireless Internet markets. We view the stock as a core holding for investors interested in the communications infrastructure market," Tinger wrote.

Tinger didn't see the company's projections as an issue, though he said he was "conservative" in his slight upward revisions to estimates for future quarters due to the weak economic environment.

Credit Suisse First Boston analyst Susan Passoni was also positive on the stock, though she admitted that Comverse may have under-promised in order to over-deliver. That was "just what the doctor ordered," however, according to Passoni, who maintained her "buy" rating on the stock.

She called the company's projections "conservative," and raising her revenue estimates slightly in fiscal 2001 to $1.518 billion versus a prior $1.505 billion estimate. That's still slightly below management's stated projections of $1.52 billion. Passoni kept her earnings estimate at $1.78 a share, in line with management's earnings.

Passoni added that the company's increase in backlog was a good sign that visibility is solid, and that the company should continue seeing market share gains in 2001, especially in the voice messaging market.

BofA Montgomery analyst Rob Sanderson was mixed on the stock, though he maintained a "buy" rating, he reduced his price target to $100 from $135.

Whatever their near-term expectations for the stock were, analysts were resoundingly positive about their long-term view. Even Zivotofsky, who downgraded Comverse, said "the strength of the company's long-term business model and dominant market position remains unchanged."