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Taking Stock: Comverse Technology Is Well-Positioned For Wireless Growth

Despite a temporary slide, its enhanced technology is solid.

Do you ever find yourself wishing that your PC's electronic address book could integrate with your wireless phone? Do you ever wonder why more wireless applications can't be controlled by your voice? Do you ever wish your wireless phone could handle E-mail and voice mail as easily as your home phone and PC?

Well, all this technology is available from Comverse Technology (CMVT-Nasdaq), a company that was founded in 1984, has been publicly traded since 1986, and is a member of the Nasdaq 100 and Standard & Poor's 500.

Despite being a major provider of software that wireless and wireline communications providers embed into their consumer offerings, Comverse isn't well known, probably because it operates behind the scenes.

The company's 390 wireless and wireline telecommunications customers include AT&T, BellSouth, British Telecom, Deutsche Telekom, KDDI and NTT in Japan, Orange (U.K.), SBC Communications, Sprint, Telecom Italia, Telmex, Verizon, and Vodafone.

Comverse's offerings include voice mail, wireless instant messaging, voice-related services such as dialing and Web browsing, voice over IP, wireless E-mail, wireless information and entertainment services, prepaid wireless services, video messaging, and additional personal communication services.

About 83% of Comverse's revenue is derived from selling these services to communications providers. Comverse's enhanced technology and customer base make the company an attractive investment, especially as consumers demand applications such as voice-activated services, entertainment services, and video messaging. Its attractiveness increases when wireless carriers realize these services will help them generate more revenue from their existing customer base and differentiate themselves from their competition. But for now, its business is declining as carriers cut back on discretionary expenditures and delay upgrades and new systems. Wireless carriers are reluctant to spend their capital on services that may not meet their required return on investment.

Most of Comverse's revenue comes from voice-mail systems, but this business is declining because carriers have already purchased large capacity and are experiencing slower growth.

Revenue was down 12% in the fourth quarter of fiscal year 2002, which ended Jan. 31, and could decline another 20% in the first quarter of fiscal 2003, which ends April 30. Growth won't occur until wireless carriers become serious about rolling out third-generation services.

Competition is fairly strong in communications services technology. Glenayre Technologies (GEMS-Nasdaq) and Octel, a subsidiary of Avaya (AV--NYSE), are two primary competitors. Larger competitors include IBM, Motorola, and Nokia, each of which offers products that compete with certain Comverse products.

Most of the rest of Comverse's business is generated by subsidiary Verint Systems. Verint said in February that its stock will be available later this year in an initial public offering. Verint provides software for digital video security, communications interception, and enterprise business intelligence. Verint's security customers include governments, airports, and transportation companies, while its business-intelligence customers are primarily call centers.

In the most recent quarter, ending Jan. 31, fully diluted earnings per share was 6 cents, which excludes nonrecurring charges of $69.3 million, or 35 cents a share. Comverse lowered its revenue and earnings estimates for the next quarter, citing a longer-than-expected time needed to close sales. Management doesn't expect to be profitable until the end of calendar 2002.

Despite the near-term difficulties, Comverse has cash, net of debt, of $6.80 per share, and it generated $57 million in cash flow in fiscal 2002. Shareholder equity was $8.68 a share. At a stock price of $13.68, the price versus book value is 1.57, an attractive multiple for a tech company with the ability to grow significantly as wireless companies get serious with 3G.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. reach him at bschaff@bayisle.com.

To discuss this column with other readers, please visit William Schaff's forum on the Listening Post.

To find out more about William Schaff, please visit his page on the Listening Post.

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