Comverse Lost $1 Billion in 3 Years

Stock options scandal leaves 2004 speculators with only 64% of their initial investment.

Nir Zalik
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Nir Zalik

After uncounted lengthy delays, Comverse Technology has finally published its audited financial statements for fiscal 2006-2009. The company's fiscal year ends on January 31. It also carried out a theoretical analysis of its stock's performance and concluded that anybody who invested $100 in Comverse stock in late January 2004, had $36 in hand at the end of January 2009.

The company's financial statement for the fiscal year ending in January 2010 are not ready. The company did not say when it might be.

Kobi Alexander during a court appearance in Windhoek.Credit: Bloomberg

The company failed to file its financial statements in all that time because of the murky situation left behind after the explosion of a stock options scandal in 2006. While Comverse is not the only company listed on Wall Street to become embroiled in backdating options, its were considered extreme. Company founder and leader Jacob "Kobi" Alexander wound up fleeing the long arm of American justice to Windhoek, Namibia, where he resides to this day, fighting an extradition request from the United States. Alexander faces 35 counts of fraud and related offenses.

In the aftermath, the company and its subsidiaries stopped issuing audited reports.

Comverse is thought to have forked over more than half a billion dollars over the last few years to prepare the financial statements it does have ready.

The final revenue figures for the four years in question do not differ substantially from the estimates Comverse released in February, but this time the reports include the bottom line.

After earning net income of $82.4 million in fiscal 2006, the company lost well over $300 million in each of the subsequent three years. Ergo, in three years, it lost more than a billion dollars in net terms.

Theoretical share price

Comverse also said that subsequent to the reported period, it experienced a significant slowdown in business, leading it to institute drastic cost-cuts.

The plan calls for cutting a total of about $90 million in expenses, in two equal phases. In the first phase, Comverse is expected to cut its staff by 400-450 employees, roughly half of whom work in Israel.

The report includes a performance analysis for its shares. In comparing a theoretical $100 investment in Comverse shares on January 31, 2004 to an equivalent investment in the S&P 500 index on the same date, it turns out the Comverse investment would have been worth $36 five years later, whereas the S&P 500 investment would have been worth $80.50.

Comverse, with its subsidiaries Verint Systems, Ulticom and Starhome, reported total revenues on a consolidated basis of $1.16 billion, $1.43 billion, $1.72 billion and $1.68 billion for the years ending January 31 of 2006, 2007, 2008 and 2009 respectively. After registering operating profits of $76.8 million for the year ending January 31, 2006, the company suffered operating losses in the three subsequent years of $389.8 million, $421.8 million and $209.9 million, respectively.

And after earning a somewhat respectable net income of $82.4 million in the year ending January 31, 2006, Comverse subsequently posted whopping net losses in the following years, of $313.9 million (2007 ), $373.2 million (2008 ) and $320.4 million (2009 ). Cumulatively, its net losses amounted to over $1 billion over the last three reported years.

Statements more precious than gold

Costs over the four-year span included $153.3 million for revising the financial statements. Since then, these costs have gone up even more: The company has already announced financial statement preparation costs of $165 million for the 12 months ending January 31, 2010, while for the quarter ending July 31, 2010, these costs came to an additional $39.1 million. Overall, the cost of preparing the company's financial reports and associated expenses is estimated to have been between $550 million and $600 million over the years.

Comverse itself, without its subsidiaries, reported revenues of $797.6 million, $973.7 million, $1.1 billion and $920.6 million for the years ending on January 31 of 2006, 2007, 2008 and 2009 respectively. After showing an operating profit of $79.3 million for the year ending January 31, 2006, the company suffered unconsolidated operating losses in the three ensuing years of $150.9 million, $258.7 million and $160.2 million.

Its unconsolidated net results for the four years, beginning in 2006, were an $87.2 million profit, a $14 million profit, a $39.8 million profit and a $20.5 million loss. Thus on an unconsolidated basis, Comverse had a cumulative net income over the four years of $120.5 million.

Expenses related to financial reporting were not significant in the period ending January 2006. But then, the storm broke around the company's options scandal, sending reporting expenses soaring - to $30.7 million in 2007, $78.5 million in 2008 and $44.1 million in 2009.

Other factors affecting results during the four-year period included large write-offs of goodwill on the Netcentrex purchase and other intangible assets, as well as acquisition costs.

To bolster its dwindling cash reserves, Comverse recently sold a property in Ra'anana to George Horesh for $29 million, and intends to sell 10% of its stock in Verint - 1.8 million shares - for $40 million. Verint has been asked to prepare a prospectus for the offering.

Compensation to CEO Andre Dahan in 2008, the company reported, totaled $4.3 million, against $3.6 million the previous year. His base salary for 2007 was reported at $750,000 and rose to $1 million in each of the following two years. After taking a 20% pay cut, his base pay for 2010 is thought to stand at $800,000.