PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
For the past year or so, any stock associated with the word wireless has had the potential to be a hit on Wall Street. We are, after all, in the midst of a full-fledged wireless revolution. At the end of 1999, there were 469 million wireless phone users worldwide, according to Yankee Group. By 2005, Yankee expects, that number will grow to 1.26 billion. That's a 20% annual customer growth rate.
Unlike the Internet arena, where early entrees such as America Online (AOL), Yahoo! (YHOO), and eBay (EBAY) established themselves as market giants, the wireless industry is already filled with cutthroat competition. Nearly 1,000 companies worldwide sell wireless service, according to Yankee Group. Since most of them use the same networks, it's hard for them to differentiate themselves on price alone.
And that has put one company in an enviable spot. Comverse Technology (CMVT) sells software and systems that allow wireless operators to provide their customers with enhanced services. An enhanced service can include voice mail, speech recognition, or even serving Web pages to your cell phone. While most of these abilities seem like the bell-and-whistle variety, they're quickly becoming important to the bottom lines of wireless operators. "If you want to attach yourself to your customers with Velcro, you need the kinds of products that Comverse sells," says US Bancorp Piper Jaffray analyst Edward Jackson.
GROWTH RECORD.
Comverse's potential seemed clear when it released its first-quarter earnings on May 31. It reported a 30% revenue increase, vs. the previous year's first quarter, to $261 million, and a profit increase of 54%, to $56.4 million, or 33 cents a share. Analysts expect it to earn $1.32 per share this fiscal year, compared with $1.09 for 1999, according to Zacks Investment Research. Its stock closed up 4 9/16 on June 2 at $94 7/8, well above its 52-week low of $32.56 but also well off its 52-week high of $123.87.
Comverse's strong growth is the main reason the stock has a price-to-sales ratio of 16, which is pretty steep for a telecom equipment maker. But that's nothing compared with other hot wireless stocks, including Phone.com (PHCM), which has a price-to-sales ratio of 78, or Aether Systems (AETH), which has a price-to-sales ratio of 242.
The key to figuring out what last quarter's numbers mean about the future of the company, says US Bancorp's Jackson, is to look at sequential quarterly revenue growth. "Each quarter, they've increased the rate of growth. That rate should have leveled off awhile ago, but it's still climbing. That means they are making more and more money off of the initial contracts as those contracts get older and older."
"ONE-TWO PUNCH."
Another promising sign, says Jackson, is the growth of the company's order backlog. It grew by 39% in this year's first quarter, vs. the first quarter of 1999. "Revenue and backlog growth are a powerful one-two punch," says Jackson. "It shows just how compelling this story is." Indeed, wireless operators buy Comverse hardware and enough software licenses to get by if they meet their initial growth forecasts. "They buy the post office, but they only buy a few mailboxes," says Jackson. "As growth continues, they can easily add more mailboxes."
Even as more customers sign up for wireless, their usage time is growing, too. According to International Data Corp., the average customer spent 155 minutes a month talking on a cell phone in 1999. In 2000, that figure is expected to increase to 247 minutes. As customers become more used to their phones, they begin to use additional services -- which means more sales of Comverse software licenses.
Of course, Comverse isn't the only contestant in this market. Its main competitor is Lucent (LU), the phone-equipment giant, whose Octel division sells messaging services to wireless companies. Lucent supplies about 40% of the installed base of wireless operators but is being shunned more and more often, says Jackson of US Bancorp. "The Lucent system doesn't scale as well and isn't reliable," he adds. "It might be cheaper, but these companies need reliability and serviceability far more than they need a cheap product, and on those two fronts, Comverse is far superior."
OUTSHINING LUCENT.
Telecom Italia (TI), Europe's largest wireless company -- with more than 20 million customers -- seemingly can testify to that. Two weeks ago, Telecom Italia announced that it was switching to Comverse from Lucent as a primary vendor. Comverse's "product had superior flexibility and superior reliability," says CIBC World Markets analyst Hampton Adams, who has a strong buy rating on the stock. "That's why they won the Telecom Italia deal, and that's why they have so much upside."
The company may find even greater upside in the old-fashioned wireline market. Few traditional phone carriers offer the full range of capabilities Comverse's products provide, because the wireline market is a regulated monopoly. But if, as appears to be happening, that market opens up to competition, watch out for Comverse. Currently, 80% of its revenues come from the wireless world, and that percentage continues to grow. But if true competition comes to the wireline market, the same thirst for enhanced services will grow there, too.
Comverse isn't just sitting around, either. It has been busy reorganizing to focus on its core enhanced-services product. In April, it spun off one of its three divisions, Ulticom (ULCM), which makes telecom signaling technology. Its third division, called Infosys, which once provided a large portion of sales, sells digital recording technology to law enforcement and intelligence services. Although Infosys now accounts for only about 10% of its parent's overall sales, the unit likely won't be spun off. The reason: Comverse can't reveal much information about it, except for basic sales figures, because of the classified nature of the technology. "It's really not much of a factor anymore in earnings data," says CIBC's Adams.
The heart of the company is, and will be, its enhanced-services product, which continues to deliver breakaway growth. As new options such as e-mail, Web content delivery, and data transmission become common features of cell phones, Comverse should be the one raking in the profits.
Sam Jaffe covers investing for Business Week Online
Copyright 2000, Bloomberg L.P.
Printer-Friendly Version
