Comverse Technology: Extending Its Leadership

As wireless telephone operators accelerate their spending to provide new services to consumers, Comverse Technology (symbol CMVT) should be a prime beneficiary. The firm is already the global leader in voice mail, with roughly half the world's market. But the real excitement will come from more-sophisticated new products, says Morningstar analyst John Slack, who recommends buying the stock.

Carriers, eager to raise average revenues per cell-phone user, are increasing their offerings in such areas as text messaging and video-based, multimedia messaging. Comverse "is looking to extend its leadership to newer, high-growth applications for wireless carriers," Slack says.

After losing money in 2002 and 2003, Comverse returned to profitability in 2004 and has been growing nicely since. "Comverse is positioned in one of the most attractive segments of the wireless market," Slack says. He expects more evidence of that when the company releases fourth-quarter results on March 15.

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The main risk to the company: Nokia and Ericsson, two of the largest cell-phone makers, are bundling messaging software in their equipment. But Slack says Comverse's technology is superior, and wireless companies are willing to pay premium prices for it.

In addition to its core business, Comverse has a fast-growing subsidiary, Verint Systems, that provides digital audio and video surveillance and security systems to government and business clients. Verint already represents 25% of the firm's revenues, which analysts figure totaled $1.2 billion in the fiscal year that ended January 31.

Because Comverse's earnings are depressed, the stock looks expensive. It sells at 35 times estimated earnings of 83 cents a share for the year ending January 2007 (up from 62 cents expected for the January 2006 year). Comverse also sells at a fairly high five times sales. On the plus side, Slack says he expects the company's net profit margins -- now 11% -- to rise. He also notes that Comverse has nearly $8.50 a share in cash.

--Steven Goldberg