Forecasts of a rosy future in 2002 for telecoms may have come too soon; the 11% rise posted by Comverse Technology (Nasdaq:CMVT) last week was countered with a 9% drop last night.
The best indicator telecom companies in general and cellular companies in particular would continue their struggle, was the announcement two days ago by Verizon Communications (NYSE:VZ) it was planning to lay off 7,000 workers as part of its streamlining efforts. The company also reported less new subscribers in the fourth quarter. Verizon is the second biggest communication company in the U.S., which provides local and long-distance calls. Its cellular division, a joint enterprise with German company Vodafone (NYSE, LSE:VOD), is the world's biggest with more than 8 million subscribers.
Verizon announced 715,000 new cellular subscribers in Q4, way fewer than analysts forecast ¿ 900,000 and 1.1 million new accounts. The subscription rate in Q4 was even lower than in the third quarter, and had analysts fearing the American cellular industry was slowing down even further.
The state of the industry may delay Verizon's plans for an IPO of its cellular division. In 2001 the cellular communications index of the Philadelphia stock exchange sank 38%, and the low valuations of the cellular division led Verizon to announce it will "not rush" the issue.
Verizon's lagging cellular operations are particularly grave for Comverse, as Verizon is one of the biggest buyers of its Trilogue systems. A month ago Comverse announced a $200 million contract to provide Verizon with voice mailbox systems to exchange its old Lucent Technologies (NYSE:LU) systems. Though market estimates had the contract much smaller, it is still a significant contract for Comverse, which bases a portion of its voice mail box sales forecast in 2002 on the American market.
Verizon may be the biggest, most influential American cellular company, but its struggles are not unique. This week Western Wireless (Nasdaq:WWCA) and Triton PCS (NYSE:TPC) announced they expect to miss their subscription forecast. Alamosa (NYSE:APS) and Dobson Communications (Nasdaq:DCEL) said the number of new subscribers was on the lower end of the range forecast. This data is not rosy, especially since Q4 is traditionally the strongest in the industry.
Add this to the reports from Radio Shack, which said sales of cellular devices in the holidays were below estimates. Though old devices are often exchanged for new ones, this is no good news for the industry. The immediate repercussions of slow cellular device sales in the U.S. is clear: the companies will need less capacity in their voice mail box systems, and will therefore buy fewer systems.
In the U.S., cellular has only entered 45% of the market, whereas in some European countries it exceeded 80%. The 45% level has some believing the American market, with its different cultural makeup and the billing system in which call takers are charged for the call, has had enough of cellular. This reality matches the forecasts of Merrill Lynch analyst Tal Liani, who a few months back said voice mail boxes were in their final days. He estimated sales of the boxes to drop 10% every year in the next four years.
Oscar Gruss & Son analyst Rami Rosen said the decreased subscription is an indicator of positive Comverse performance. "If the Comverse and Verizon contract is for voice systems for new subscribers, then Comverse has got a real problem on its hands,¿ he said. ¿But even if it isn¿t so, Comverse may still have to combat certain difficulties, because the meaning of less subscribers is smaller need of cellular operators for new investments and technologies.¿
The bulk of future sales for Comverse is indeed in the voice mail box systems department, though the company makes and markets other added value systems such as SMS, unified messaging, cellular Internet and other services which could generate it quite a lot of revenues, and could be negatively impacted by the reduced investing in the industry.
Rosen, who gives the share a Hold rating and sets its target price at $20, says the share has recently reached exaggerated levels; ¿The company predicts an EPS of 60 cents, and when the share is at $27, we are talking a 45 multiple on a company whose performance is plunging.¿
Rosen attributes the rises to the lack of alternative yield generators in the American market.