Comverse option probe worries analysts

Merrill Lynch cited similar concerns and downgraded the shares to "neutral" from "buy."

comverse logo 88 (photo credit:)
comverse logo 88
(photo credit: )
Analysts reacted with concern Wednesday to Comverse Technology's announcement that it may restate its financial results due to questions surrounding the accuracy of the dates on its option grants. "One of the principle concerns for the stock is that uncertainty with regards to what is being investigated, how long it takes and how long it will be an overhang on the shares," said Robert W. Baird analyst William Power, who downgraded the shares to "neutral" from "outperform." "It has the potential to drag on, especially if the SEC chooses to investigate which is unclear at this stage." Earlier this week, Comverse said it had convened a special committee of its board of directors to review matters relating to its stock option grants, and delayed publishing its 2005 end of year earnings, which had been scheduled for release Wednesday. "Comverse had not been expensing the options and intended to start recording the expense in this fiscal year," said Power, who does not own any Comverse stock. "What they had done is disclose in their SEC filing what their potential impact would be if they had been included." Whatever possible restatements would occur, he said it seems it won't result in restating past earnings but could result in restating some of the previously made predictions. "Until we get more clarity for further resolution to the investigation, it will be difficult for the stock to move forward. Our net view is that we expect it to trade in a pretty tight range now," Power said. Merrill Lynch cited similar concerns and downgraded the shares to "neutral" from "buy." "We suspect that the investigation relates to in-the-money options granted in the mid-to-late 90s but which were misreports as 'at-the-money' in order to avoid related expenses," Merrill Lynch analyst Tal Liani wrote in a note to clients. Liani, however, noted that regardless of the option issue, the company continues to "execute well." In its preliminary earnings, released at the same time it made the options announcement, Comverse said it had sales of $337 million in the fourth quarter of 2005, its 13th successive quarter of revenue growth, and ended the quarter with a record backlog of orders of $798m. Standard & Poor's, meanwhile, on Wednesday put the company's corporate credit and senior unsecured debt on CreditWatch with negative implications, meaning it could be downgraded. Other analysts, though expressing concern over the options issue, remained upbeat about the company's outlook, however. "We are maintaining our 'Positive' rating based on excellent core business fundamentals," Susquehanna Investment group said in its review of the company. "Our view assumes Comverse's accounting issues are restricted to non-cash option grants, which we hope will be resolved by May 1."