ECtel's Fraud Prevention Technology Gets Hewlett-Packard's Attention

There no question that homeland security and the war on terror grab all the headlines, but telecom fraud has been estimated to cost operators between 3-8% of annual revenues. Leading the war against this type of fraud is a small Israeli company called ECtel (ECTX). ECtel developed a fraud management solution for fixed line, wireless and next generation communication service providers. It has gained significant traction, and its solutions are deployed at over 75 operators worldwide.

The company has focused much of its attention in Eastern Europe, where telecom fraud is a problem that is getting worse by the day, and the company looks to be well-positioned to profit.

Unfortunately, though, for investors, profit is the name of the game and it’s something ECtel has a problem delivering. Revenues in the 1st quarter fell 46% from comparable quarter in ’06. Orders from the former Soviet Union were slower than anticipated, a large order from a large existing European customer was delayed, and there was a delay in receiving payment from customers for certain projects.

With this financial background, why would an investor bother looking at making an investment in ECtel? The company has cash and cash equivalents of $36.1 million, and the current market cap is about $50 million. This certainly provides a cushion as to how low the stock can drop.

More interesting are the rumors I have been hearing from people in the local telecom business. Hewlett-Packard (HPQ) has a similar fraud prevention product, but they are having all kinds of troubles penetrating the market and have only 3 deployments until now. It’s well-known that Hewlett-Packard has acquired numerous Israeli companies, so for many reasons, this makes sense. Oracle (ORCL) and International Business Machines Corp (IBM), could also be potential suitors as they are always trying to update their product suite, as I mentioned in a previous blog entry.

ECTX 1-yr chart

Disclosure: The author’s fund has no position in ECTX as of June 5, 2007.