(By Mani) Comverse Inc. (NASDAQ: CNSIV), following a spin-off from Comverse Technology Inc. (NASDAQ:CMVT), may unlock shareholder value in the long term thanks to increased operational focus and improved execution on opportunities in the communications software segment.
The focus is backed by increased flexibility and the recent appointment of a new, operationally-focused management team.
Comverse is one of the primary players in communications software. Its solutions are aimed to help communication service providers generate voice and data traffic, increase revenue and customer loyalty, monetize services and improve operational efficiency.
Comverse solutions are used by more than 450 wireless, wireline, and cable-network communication service providers in more than 125 countries, including the majority of the world's 100 largest wireless network operators.
"While carrier spending remains fairly muted, Comverse may have opportunities in business support systems, especially within the converged billing space which is displaying mid-20s growth where the company is the top player, though competitors are close behind," RBC Capital Markets analyst Daniel Meron said in a client note.
Value added services (VAS) seen as a cash cow, for now, faces challenges from competing messaging platforms like emails and over-the-top mobile applications, yet could benefit if Comverse IP-based VAS platform gains traction in fiscal year 2013.
"In our view, successful leverage of the company's prime positioning in the business support systems (BSS) and VAS segments could produce core revenue growth of mid single-digits and above, ahead of the segment at low single-digits," Meron said.
Broadly speaking, BSS and mobile Internet/IP policy management solutions are considered as the company's growth business and accounts for mid- to high-40s portion of 2012 business.
In addition, with increased efficiency, operating margins may gradually expand from low-single digits towards the long term target of mid-teens which is similar to peers. Ultimately, this could drive increased investor comfort with the Comverse story and help drive multiple expansion from approximately 0.7x towards a blended peer average of nearly 1.0x.
Moreover, improved cash generation may open routes to enhance shareholder returns via buyback or dividends longer term. Furthermore, the company may take part in the ongoing M&A in the industry upon successful delivery on targets.
The separation from Comverse Technology away from its corporate issues and the appointment of operationally driven management team can improve the company's focus. This may support top line growth, closer alignment of operations and business management, and also enable some surgical improvements in the company's cost structure.
"It remains to be seen what amount of the company's historical NOL (Net Operating Losses) could be used to offset future earnings, and the range could vary from nil to 15 percent in our view," Meron noted.
Over the past several years, much of the net buying into the CMVT story came from event driven/arbitrage/hedge funds. As the CMVT split occurs, some investors ponder on the impact of the change in investor base.
"The event terms, timeline and guidelines were anticipated and visible for a long while ahead and hence we do not expect a sudden shift in investor base, but rather a gradual process where long term oriented investors ramp up their knowledge of the story as CNSI story crystallizes," Meron added.