In the past couple of weeks, I've been inundated with requests for updates on the latest news from two companies I've
talked about before:
More Growth for Comverse
reported its third-quarter earnings last week, and the numbers weren't great. Although it met consensus estimates, its per-share earnings dropped to 11 cents before items, compared to the year-ago 38 cents.
Most disturbing was its fall in backlog and deferred revenue, which helped to push the company to meet Street estimates. When those numbers drop, it means that some of the revenue Comverse recognized came from those places on its spreadsheet rather than from pure growth. As was widely expected by all analysts and their dogs, Comverse announced it would cut 900 jobs, or about 15% of its staff. It's a good move on the company's part, as headcount will more accurately align demand.
The conference call itself wasn't exactly exciting. In response to questions about how Comverse arrived at its guidance and at its conclusion that a recovery in demand would happen in the second half of 2002, management's answers were bothersome. Rather than discussing backlog, long-term contracts and the like, they cited ethereal trends and customer demand. Troubling as this lack of concrete guidance was, the
reported Monday isn't a joke, and I imagine it was factored into their mindsets on the call.
Comverse remains profitable and dominant in the voicemail business. In spite of some analysts' predictions that the voicemail business is in terminal decline, I think we'll see Comverse return to growth. Frankly, I think the analysts are wrong.
Its balance sheet is still impressive. Bottom line: Though its quarter was less than brilliant, I've got tough love for the company and I'm still bullish.
A Smart Fit for Tellabs
The questions I'm getting about Tellabs center on its recent
told readers a few months ago that Tellabs was out shopping for an acquisition and, boy, did it pull off a doozy!
Ocular's product line of high-density cross-connects, which are targeted to smaller- and medium-sized central offices, is a great fit for Tellabs' larger cross-connect systems. This acquisition greatly expands Tellabs' market opportunity. As I
keep saying, it's incredibly important for vendors to be well entrenched with cash-rich customers (basically, the incumbent local exchange carriers, or ILECs). Tellabs is entrenched with most of these, and we'll see Tellabs leverage its customer base to drive revenue for Ocular's product line.
I've never heard a company's competitors so unanimously affirm an acquisition. Both private and public Tellabs competitors told me (off the record) that it was a great deal. Ocular undoubtedly came with an expensive price tag, as Tellabs paid some $300 million in cash and $55 million in options for it. I would have liked to see Tellabs use its stock as currency for at least part of the purchase, but Ocular's owners aren't dummies. They've watched all their buddies who sold out for stock over the past few years get taken to the cleaners. Cash is king, after all.
There's also no doubt that Tellabs had competition for the acquisition. Bottom line: I
told readers to take some Tellabs off the table when the stock was at $17.95 because of concerns with the company's ongoing product transition problems.
The stock has dropped about 20% since then to close Tuesday at $14.50. Although I'm obviously psyched about the Ocular acquisition and still holding some Tellabs, I'm not buying any back here. Tough love indeed, no?
Cody Willard is president of TelEconomics Consulting, a financial and technology consulting firm. He is also founder of
TelEconomics.com, a Web site devoted to news and analysis of telecommunications stocks. Previously, he was senior analyst for a venture development company, and before that was a partner at the Lanyi Research division of CIBC World Markets. At time of publication, Willard was long Tellabs, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Willard appreciates your feedback and invites you to send it to