Here’s the entire text of the prepared remarks from Comverse Technology’s (ticker: CMVT) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.
Kobi Alexander, Chairman and Chief Executive Officer
David Kreinberg, Chief Financial Officer
Zeev Bregman, Chief Executive Officer, Network Systems Division
Paul Baker, Vice President, Corporate Marketing & Communications
Tim Luke, Lehman Brothers, Analyst
Thomas Ernst, Deutsche Bank, Analyst
Marianne Wolk, Susquehanna Financial Group, Analyst
Tom Roderick, Thomas Weisel Partners, Analyst
Sterling Auty, J.P. Morgan, Analyst
Daniel Meron, RBC, Analyst
Will Power, Robert W. Baird, Analyst
Scott Sutherland, Wedbush Morgan, Analyst
Shaul Eyal, CIBC World Markets, Analyst
James Faucette, Pacific Crest, Analyst
Jason Willey, Moors & Cabot, Analyst
Larry Harris, Oppenheimer, Analyst
My name is Carol and I will be your conference facilitator today. At this time I would like to welcome everyone to the Comverse Technology Third Quarter 2005 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session.
Thank you. Now I’d like to turn the call over to our host Mr. Paul Baker, Vice President of Corporate Marketing.
Paul Baker, Vice President of Corporate Marketing
Thank you, Carol. Hello, I am Paul Baker, Vice President, Corporate Marketing and Communications for Comverse Technology which is traded on NASDAQ, ticker symbol CMVT.
With me on the call today are Kobi Alexander, our Chairman and CEO, and David Kreinberg, our Executive Vice President and Chief Financial Officer. Also joining us for the question and answer session will be Zeev Bregman, CEO of Comverse Network Systems Division.
Before starting the call, I’d like to mention that certain statements that are not historical are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. The words estimate, project, intend, expect, believe, and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risk and some uncertainties. Any of the number of factors could cause the actual results, performance or achievements of the Company to be materially different from those that maybe expressed or implied by such forward-looking information.
These risks and uncertainties, as well as others, are discussed in greater detail in the filings of the Company with the Securities and Exchange Commission, including its most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q. All documents are available through the SEC’s Electronic Data Gathering Analysis and Retrieval system or EDGAR, at sec.gov or our website at cmvt.com. This call is the property of Comverse Technology Inc., any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Comverse Technology Inc., is strictly prohibited.
Certain numbers and percentages have been rounded maybe approximation. The content of this conference call is time sensitive and reflect the Company’s perspective as of December 06, 2005.
By now, you all should have seen a copy of our press release which was issued after market closed this afternoon. If you have not received this release, please refer to businesswire.com or our website at cmvt.com. Please refer to our press release and website for reconciliation of our GAAP and pro forma net income discussed on this call. We undertake no obligation to update the content of this call even if events, circumstances or expectations change after this call. Any questions regarding our guidance and our business model should be addressed during this conference call, as we do not intend to address guidance and modulated increase following the call. Our guidance today, represents our best current estimate recognizing as always that forecasting beyond the immediate future is difficult.
During today’s call Kobi Alexander will present his perspective on our business and market trend, and David Kreinberg will present a more detailed review of our third quarter results and financial guidance. We will conclude with a question and answer session.
With that I will turn the microphone over to Kobi.
Kobi Alexander, Chairman and Chief Executive Officer
Thank you, Paul. Hello everyone and thank you for joining us today for review for our fiscal 2005 third quarter ended October 31, 2005. Our third quarter revenue was $299 million, up 21.8% year-over-year and up 4.6% sequentially. Our pro forma earnings per diluted share was $0.17, and was $0.02 better than our guidance. Pro forma net income was up 113.6% year-over-year and up 21.8% sequentially. Pro forma operating margin was 10.2%, up 120 basis points sequentially.
Our GAAP earnings were $0.18 per diluted share, and was $0.04 better than our guidance. GAAP net income was up 140% year-over-year and up 10% sequentially. Please refer to our press release for a fully consolidation of our GAAP and pro forma net income.
Comverse Network Systems represented 69% of the Company’s third quarter sales and was up 25.5% year-over-year and up 5.1% sequentially.
Our Verint Systems unit contributed 26% of the Company’s third quarter sales posting year-over-year sales growth of 22.3% and sequential growth of 4.7%. Ulticom contributed 4% of the Company’s third quarter sales. Our Q3 orders backlog grew sequentially by $57.6 million to a record $646.2 million at October 31, up 9.8% sequentially and up 35.5% year-over-year.
Looking ahead, we are increasing our pro forma revenue guidance for fiscal 2005 fourth quarter ending January 31, 2006 from $296 million to approximately $325 million. This guidance assumes we will close our acquisition of the GSS division of CSG Systems by mid-December. At $325 million, we would expect pro forma earnings per diluted share of approximately $0.18, up $0.02 from our previous guidance.
We are also introducing preliminary guidance for fiscal year 2006 ending January 31, 2007. For Q1 ending April 30, 2006, we expect pro forma revenues of approximately $367 million and we expect sequential revenue growth of $12 million per quarter for the remainder of the fiscal year. We expect quarterly pro forma diluted earnings per share for fiscal 2006 as follows: for Q1 $0.19, for Q2 $0.20, for Q3 $0.21 and for Q4 $0.21. This results in fiscal 2006, full year pro forma revenue guidance of $1.5 billion and fiscal 2006 full year pro forma diluted earnings per share guidance of $0.81.
Our Network System division sales were up 25.5% year-over-year, and were up 5.1% sequentially. This division's mission is to be the first choice of telecommunication service providers for solutions, which enhances the Total Communication experience. These solutions are designed to increase Average Revenue Per User or ARPU and the foster competitive differentiation and churn reduction for our approximately 400 communication service provider customers. We are leveraging this substantial customer base through a range of applications designed to deliver fast ROI and for the implementation of product upgrades designed to improve the functionality, utility, and cost of ownership of our installed base.
Comverse’s systems provides an open services environment through which wireless and fixed network operators can offer a comprehensive suite of tightly integrated services including among others call answering, call completion, call management services, data, messaging and content delivery services, and real-time pre-paid, post-paid, and converged billing solutions.
Our solutions are enabling an expanding area of popularity in emerging communication applications for wireless and fixed network operators. We have successfully leveraged our considerable installed base of call answering customers for the sale of additional enhanced services and the infrastructure that enables mobile data applications.
Revenues from our next-generation messaging, data, content, and billing solutions were 69% of the Network Systems division sales. Our next generation InSight Open Services Environment continues to gain traction in both existing Comverse accounts and as a catalyst for competitive displacements and penetration of new accounts. We continue to advance our market position in multimedia messaging, in text messaging, and in the emerging wireless music applications arena with our Ringback Tone solution. We also continue to increase our presence in the billing space. Our pending acquisition of GSS is designed to further position us for long-term leadership in the overall billing market, and in particular in the emerging converged billing segment. We also continue to see customer activity in emerging next-gen services such as wireless video applications, visual voicemail and mobile instant messaging.
We believe that the underlying long-term growth trend for telecommunication enhanced services usage is healthy and with over time, enhanced services will become more and more important in the generation of traffic and ARPU for network operators.
Our customers indicate that value-added services will continue to expand in importance and gradually will contribute a much larger proportion of the revenues than they contribute today. We believe our heavy R&D investment, our vast installed base, and our cost-effective modular evolutionary approach to providing new applications and functionality to our customer positions us well for continued market leadership and to deliver on our mission to be the first choice of telecommunication service providers for solutions that enhance the total communication experience.
Our Verint Systems subsidiary which as of October 31 was approximately 68% owned by Comverse Technology and is publicly traded under the ticker symbol VRNT represented 26% of the Company’s sales during the third quarter.
Verint sales were up 22.3% year-over-year and a 4.7% sequentially. Verint is a leading provider of analytic actionable intelligent solutions for communication interception, network video security, and business intelligence. Verint solutions power actionable intelligence by capturing structured and unstructured information from voice, video, and IP networks, applying advanced analytics to unearth critical intelligence, and delivering this intelligence to decision makers for effective action. Verint’s actionable intelligent solutions for security, which accounted for nearly 70% of Verint's third quarter sales, grew 4.3% sequentially and 29.9% year-over-year. Verint’s actionable intelligent solutions for business intelligence grew 5.7% sequentially and increased 8.1% year-over-year. Further more Verint achieved record levels of pro forma operating and net income.
We believe the emphasis on security and the focus on anti-terrorism will present new opportunities for Verint. Verint’s communication interception products are sold to law enforcement and intelligence agencies around the world. These products enable the interception, recording, and analysis of communication over a wide variety of wireline, wireless, and IT networks to obtain actionable intelligence and for evidentiary purposes. Verint's network digital video security actionable intelligent product provides intelligent recording and analysis of captured video, primarily for security applications and are sold to government agencies in public and private organizations for using facilities such as airports, public buildings, critical infrastructure, correctional facilities, and corporate sites.
Verint's business intelligence products consist primarily of multimedia monitoring and analytic tools used to generate actionable intelligence primarily in support of contact sensor customer relationship management efforts and video system to allow enterprises and institutions to improve operations, process, and performance, and for margin improvement through theft and fraud prevention. Verint is a leader in all its major markets serving over 1,000 organizations in over 50 countries.
Our Ulticom subsidiary which as of October 31, was approximately 68% owned by Comverse Technology and is publicly traded under the ticker symbol ULCM generated 4% of company-wide sales, excluding sales to Comverse’s Network Systems division. Ulticom is a leading supplier of service enabling network-signaling software. This software is enabling technology for a variety of intelligence network-based communication services such as real-time billing solutions, and is also embedded in the architecture of several providers of next generation IP soft switching products.
Overall, we have a leading position in our major markets, and we believe that in our major areas of operation, we have a competitive product offering, a strong new product and application development pipeline, and a large customer base into which these new products can be sold. And we have the financial strength and stability, including: at October 31, a record $2.3 billion in cash and short-term investments including record net cash of $1.8 billion.
David Kreinberg will now present a review of our financial results along with more detailed guidance. David?
David Kreinberg, Chief Financial Officer
Thank you, Kobi. Sales for the three months ended October 31, 2005 ere $299 million, up 21.8% year-over-year and up 4.6% sequentially. Our pro forma earnings per diluted share was $0.17, and was $0.02 better than our guidance based on an average diluted share count of 216 million. Pro forma net income was up 113.6% year-over-year and up 21.8% sequentially.
Our GAAP earnings was $0.18 per diluted share, and was $0.04 better than our guidance. GAAP net income was up 140% year-over-year and up 10% sequentially. Please refer to our press release for full reconciliation of our GAAP and pro forma net income.
The Company’s Network Systems Divisions’Q3 sales were up 25.5% year-over-year, up 5.1% sequentially, and generated 69% of the Company’s third quarter sales. CNS' pro forma operating margin was 9.6%, up 190 basis points sequentially. Trilog and AccessMP based systems, software, and services enabling call answering and related applications generated 31% of the Network Systems division sales. Next-generation messaging, data, and content solutions, and billing platforms contributed 69% of divisional revenues.
Verint’s generated 26% of company-wide sales. Verint’s total sales were up 22.3% year-over-year in Q3 and were up 4.7% sequentially. Verint security activities represented nearly 70% of Verint’s quarterly sales and grew 29.9% year-over-year and 4.3% sequentially. Verint’s business intelligence sales grew 5.7% sequentially and grew 8.1% year-over-year.
Ulticom contributed 4% of company-wide sales.
Looking at regional activity, sales percentage contributions were as follows: The Americas, 'mid 30s', Europe, 'high40s', and the remainder in Asia Pac and the rest of the world. Our orders backlog was a record $646.2 million, up $57.6 million or 9.8% sequentially, and up 35.5% year-over-year.
Our pro forma operating results were as follows: gross margin for the quarter was 59.9% compared with Q2 60.2%. Our pro forma operating margins were up 120 basis points sequentially to 10.2%. Net Research and Development expenses were $65.6 million, and SG&A expenses were $83.1 million. Interest and other income, including minority interest and equity in affiliates was $13.5 million. Quarterly cash flow from operations was $33.8 million.
Turning to our balance sheet, DSOs were 85 days. Advanced payments for customers were $119 million. Inventories were $131 million. The Company ended the quarter with record cash, cash equivalents, bank time deposits, and short-term investments of $2.3 billion, including record net cash of $1.8 billion and record working capital of $2.3 billion. On December 1, 2005 our outstanding $87.3 million of 1.5% convertible debentures matured and was repaid in full. As of October 31, 2005 we had record assets of $3.1 billion and record shareholders' equity of $1.9 billion. Our guidance today is presented within the context from geopolitical uncertainty and as such our ability to forecast with accuracy and confidence beyond the immediate future is difficult. We are increasing our pro forma revenue guidance for fiscal 2005’s fourth quarter ending January 31, from $296 million to approximately $325 million. This guidance assumes we will close our acquisition of the GSS division of CSG Systems by mid-December. At $325 million, we would expect pro forma earnings per diluted share of approximately $0.18 based on the diluted share count of approximately 216.5 million, up $0.02 from our previous guidance.
We are also introducing preliminary guidance for fiscal year 2006 ending January 31, 2007. For Q1 in the April 20, 2006 we expect pro forma revenues of approximately $357 million and we expect sequential revenue growth of $12 million per quarter for the remainder of the fiscal year. Pro forma revenue guidance reflects the impact of the expected write down of deferred revenues associated with the our pending GSS acquisition.
We expect quarterly pro forma diluted earnings per share for fiscal 2006 as follows: For Q1 $0.19, for Q2 $0.20, for Q3 $0.21, and for Q4 $0.21. Pro forma earnings per diluted share excludes the impact of purchase accounting adjustments related to the write-down of deferred revenue, amortization of intangibles, and other acquisition-related costs, as well as stock-based compensation charges and their minority interest and income tax effects. A very preliminary estimate of the our GAAP EPS would be $0.05 lower than pro forma in Q4 and $0.12 lower than pro forma in each quarter in fiscal 2006.
We expect fourth quarter interest and other income including minority interest and equity in affiliates to be approximately $13 million and to average about $12 million per quarter throughout fiscal 2006. We expect our diluted average share count for fiscal 2006 to be approximately $217.5 million.
To summarize our newly introduced full-year fiscal 2006 preliminary guidance yields expectations for fiscal 2006 pro forma revenues of $1.5 billion and fiscal 2006 full-year pro forma earnings per diluted share of $0.81.
Operator, we will now be happy to answer questions. Operator?
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