Is Israel’s hi-tech flagship sinking?

Comverse Technology to lay off 500 workers, cut expenditures

comverse 311 (photo credit: Channel 10)
comverse 311
(photo credit: Channel 10)
Shares at Comverse Technology plunged 33 percent over the weekend after the world’s largest maker of voice-mail software warned about a cash squeeze and layoffs forcing a fast sale of its holdings and restructuring of the company.
“These are challenging times,” Andre Dahan, CEO of Comverse wrote in a letter to employees over the weekend.
On Friday, Comverse shares fell $2.40, or 33%, to a low of $4.78. Over the past year, the shares traded between $7.05 and $9.90.
In the letter, Dahan said that company’s results for the first half of fiscal 2010 were disappointing due to continued weakness in product bookings at Comverse and negative cash flow from operations in both the first and second quarters of this year.
Since the beginning of this year, cash reserves at Comverse have narrowed gradually from $448 million in January to $371m. at the end of April and $327m. as of the end of July.
Moreover, Comverse warned that in the event that it is unable to raise capital through asset sales or obtain a cash influx through some other strategic options, it expects cash and cash equivalents to decline to $100m. by the end of April 2011 and to have a potential shortfall of $50m. in cash to support the working capital needs in 2012.
Dahan announced a cost-reduction plan to reduce annual operating expenses by approximately $45m. Most of the cost reduction, which will be implemented by year-end, will result from dismissals and a reduction in programs.
The wave of layoffs is estimated to affect 500 Comverse workers worldwide, of whom 300 are expected to be in Israel. Comverse employs 4,000 workers, of whom about half are in Israel.
Comverse also said that it has hired Goldman Sachs as a financial adviser to explore strategic and capital-raising alternatives.
Comverse, historically one of Israel’s most profitable hi-tech companies, has been struggling to recover from the backdating scandal in 2006 when former CEO Kobi Alexander and two other men were charged with backdating millions of stock options and fraudulent financial reporting.
The scandal has led to a near-complete replacement of the company’s management. Since the scandal, Comverse has failed to publish financial reports. For the last couple of quarters, the company has again and again missed targets to restate earnings for at least six years affected by the alleged financial schemes.
On Thursday night, Comverse delayed their filing time-line to September from the original deadline set for August.

“The ongoing delays related to its filing process and continued cash burn prove to be frustrating, particularly given the fact that the largest drain on cash is the company’s filing process,” Barclays Capital wrote in a note to investors.
“During its most recent quarter, the company spent an additional $39 million from its cash coffers alone bringing the total amount of cash utilized from this process to a sum north of $500m.”
However, Barclays Capital raised cautious optimism that the completion of the company’s filing process should materially lift the largest drag on its cash flow, in addition to the benefits of its cost-cutting initiatives.
“We are left with Comverse shares implying little to no value, ongoing challenges with its core business, and a management that seems committed to pursuing strategic alternatives as evidenced by the hiring of an investment bank,” wrote Barclays Capital.
“We recognize that the company is on tenuous grounds as its current cash burn could put it in a position whereby it has insufficient cash to fund its operations by the end of 2011. However, the company is not without alternatives in our view. While the company’s current situation is not where we had expected them to be, we believe the restructuring efforts could accelerate from this point onwards.”
Barclays Capital reiterated its “Overweight”rating for Comverse but cut its target price by nearly a third from $11 a share to $8.