Will it meet the forecasts? Lower its estimates? Cut more staff? All will become apparent on Wednesday evening, when Comverse Technology (Nasdaq:CMVT) publishes its first-quarter results.
Investment houses covering the messaging technology maker are confident it won't fall short for the first quarter, which ends for it in April. Not because it had such a great quarter, or because conditions in the telecommunications market have improved.
No, they calculate by elimination: In March, when announcing the company's fourth-quarter results, Comverse's chiefs sharply lowered estimates for the future. They have not done so again. Therefore it looks like the company will meet forecasts, otherwise they'd say so.
After all, Comverse managed to beat estimates for 28 quarters running. It also traditionally lifted its estimates, until starting to stutter three quarters ago.
So what may we expect come Wednesday? Comverse says it expects a net loss of 6 cents per share, or $11 million. Its operating losses will be about $22 million. The company thinks it will revert to positive profits or balance by year-end.
At the end of the fourth quarter, Comverse predicted first-quarter sales of $220 million, 17% down from the fourth quarter and 40% less than in the corresponding quarter of 2001.
The average forecast of 10 Wall Street analysts is for sales of $219 million, slightly below the company's forecast.
UBS sees second-quarter income drooping
In March, Comverse issued predictions only for the first quarter, UBS Warburg analysts Jonathan Half and Tomer Jacob point out. As for the second, the average forecast is for steady or better income ¿ but UBS doesn't buy that. Its analysts think Comverse will present a 5% slide in sales to $208 million, because the voice-box market is not picking up.
Comverse isn't talking about the second quarter yet, though it will in its conference call at 24:00, Israel time, on Wednesday.
Credit Suisse First Boston's Susan Passoni and Chris Schott remarked that Comverse's income slid badly in the first quarter, they hope for the last time. They estimate that Comverse will generate income of only $176 million in the first quarter, down 20% from the fourth quarter.
Verint Systems (Nasdaq:VRNT) will generate 16% of Comverse's quarterly income, they estimate, by virtue of revenues totaling $34 million ¿ the same as in the previous and parallel quarters. Ulticom (Nasdaq:ULCM) will provide 3% of Comverse's income, with sales of $7 million, down 30% from the corresponding quarter of 2001.
Wielding the ax
That's the financials. What about cutbacks?
As the fourth quarter ended on January 31, 2002, Comverse had 5,650 employees, out of whom 77% were scientists, engineers and other R&D people. Will the 15% fired during the fourth quarter be the end of the cutbacks? No, CSFB predicts: unless income significantly improves, expect more axing in the second half.
Comverse's spending structure is improving, they say. But its fixed expenditures structure led to a hefty drop in profit per share, compared with its drop in income. Its staff cutbacks, which should save it $70 million a year, will only be really felt in its first quarter results.
Comverse points out it hasn't mentioned anything about more job cuts, though analysts are talking about 850 to 1,000 heads. It's all speculation, the company sniffs: when it has anything to tell its shareholders, it will.
Meanwhile, Comverse's fourth-quarter operating costs came to $152 million. CSFB thinks the company can cut that to $144 million in the first quarter.
Using cash to redeem bonds
One point Comverse's favor is its heavy kitty, of $1.9 billion at the end of the fourth quarter. The company's debts total $60 million ¿ leaving it $1.3 billion net. Meanwhile, it has $420 million worth of outstanding bonds.
This is a great situation for the company to reclaim heavy debt for a low price.
Comverse's convertible bonds bear a coupon of 1.5% and a conversion price of $116, a reminder of long-ago share price peaks. Today its share is doddering at $11.8, last seen in 1998 (adjusted to splits). It is very much in Comverse's interest to make the move.
Comverse's market cap stands at $2.3 billion. It's trading at a multiple of 1 to estimated 2002-2003 sales, meaning, at a discount compared with its peers. CSFB sees its share price rising to $12 or $13 at least, with a sales multiple of 1, even possibly as high as $15-plus.
Whence their optimism? Passoni and Schott say that despite the acute telecoms slowdown, Comverse believes 50% of its cellular operator clients have used up their voicemail resources. That doesn't mean they'll be ordering more voicemail capacity right away, but it could mean that Comverse's slump has bottomed out, and that the only way is up. The acquisition of Singlesoft by Innowave also shows the communications operators are getting hungry again, CSFB's analysts note.
UBS Warburg begs to differ, seeing no improvement in the voicemail market for the time being. Nor has Comverse positioned itself as the leader in next-generation messaging, they say ¿ not the most hopeful message for the Israeli company.