ECI the hopeful

Its recent recovery may have ECI thinking big again, perhaps a tad too soon
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For the first time in months, the consensus among analysts covering ECI Telecom (Nasdaq:ECIL) is upbeat. They all believe that ECI is positioned to really implement its business plans, aside from the anticipated drop in results by Enavis, its bandwidth management division.

These analysts are willing to bet that ECI's results, to be published November 7, will meet pre-announced improved cash flow and reduced losses.

This is no mean feat for a company that dealt so many disappointments to its investors.

"These are still results that give ECI nothing to boast about," Oscar Gruss analyst, Rami Rosen, puts things in perspective. But at least the company is meeting its forecasts and plans.

What are those plans, anyway?

In the first week of October ECI warned that Enavis sales would slide $16 million, maybe $17 million, from $30.5 million in the previous quarter.

ECI's consolidated Q3 revenues will be $250 million to $255 million, down 4.3% to 6% from the first and second quarter. Average Wall Street forecasts are that it will lose 24 cents per share. This is certainly nothing to cheer about.

Acute cash management difficultiesBut as UBS Warburg analyst Jonathan Half says, these results are more than reasonable.

"If we take the results of ADC Telecommunications (Nasdaq:ADCT) as comparison, then we see sales are down by a consistent 20%, compared with 5% for ECI," he explains.

Note, though, that UBS is involved in some transaction ECI is about to wrap up.

ECI ended the second quarter with $190 million in cash, $199 million if you include its short-term investments. Yet it has debts of $335 million, or in other words a $145 million deficit.

Half names cash management as one of ECI's most acute problems. He praises the company's handling of the crisis so far: it reduced its cash burn from $190 million in the year's first quarter to $32 million in the second.

But the increase in cash could be due to selling receivables to collection companies, not necessarily due to thriving activity. ECI could also sell divisions or holdings, thus sustaining its positive cash flow, he points out.

At this point, Half takes a lash to ECI's restructuring process.

After all the changes it has undergone, it is still the same company. In essence nothing much has happened there, Half wrote. He declined to say whether the company should lay off more workers, but it must understand its dream of becoming the Israeli Nokia is not realistic, he concluded.

Half's most significant criticism touches on ECI's subsidiaries. The process of spinning them off and floating or selling them is too slow, if it's happening at all. If it were up to Half, he would merge Enavis with another ECI division, Lightscape.

Though the two engage in entirely different fields, both are related to optics. Enavis specializes in cross-connectivity, and aims to bridge the gaps between the various standards used today, such as conversions from sonnet to SDH, and facilitate data-centric converged services. Lightscape specializes in optic platforms.

Half believes InnoWave ECI Wireless Systems, a wireless local loop company that specializes in fixed wireless access, also has to justify its existence, or merge with one of the other companies in its field such as the Netro Corporation (Nasdaq:NTRO), Vyyo (Nasdaq:VYYO) or Alvarion (Nasdaq:ALVR).

Half defines Inovia, ECI's access division as the greatest generator of sales, but also a serious cash drain. "I¿d leave in access and optics and sell the rest," he says.

Meanwhile, ECI shows no signs of progress in selling its units, though rumors abound.

The only deal to be done is selling of the business system division to Ran Bregman for $12.4 million. That was it. ECI apparently scorned all offers as too low.

One wonders how Jonathan Kolber, named CEO of Koor Industries (NYSE:KOR) in 1998, managed to sell dozens of Koor holdings in the two years that followed, yet never managed to get ECI, which he chairs, to sell anything at all.

Maybe he's still harboring a secret ambition to create an Israeli telecom conglomerate. But it doesn't look like ECI is about to fill the billing.