The Comeback of Comverse

In the run-up to its all-important relisting on Nasdaq, the company is working at restoring confidence, among workers and customers alike

Vadim Sviderski
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Vadim Sviderski

Comverse's management is taking steps to restore investor confidence in the company as it moves toward resuming trade on Nasdaq.

The company recently overcame a substantial hurdle by finally filing a financial statement for 2010. From now on, for the first time since its stock options scandal exploded in 2006, the company should be posting its financial statements on a timely basis. Wall Street circles think it could relist for trading on the Nasdaq main market as early as July.

However, management faces a hurdle just as great as making order in the company's financials, which cost it over $500 million dollars: restoring trust among investors, and its own workers, all of whom were badly burned by the scandal.

Comverse's stock options shenanigans involved not only backdating, but also the formation of a slush fund involving imaginary employees. After the scandal broke, Comverse founder and CEO Kobi Alexander fled the arm of American justice to Namibia, while about 2,000 employees were fired. Comverse stock was relegated to the pink sheets.

Yet while working hard to untangle its financials, the company soldiered on. Its results for 2010 show improvement in most parameters. Mainly, Comverse narrowed its losses and brought in revenues that beat the forecasts. Cash flow remains negative, meaning the company is spending more than it's earning, but the company had $580 million in cash at year-end 2010.

After the company's management at the time of the scandal disappeared, Andre Dahan took over at the helm. At the start of 2011, Dahan announced a new strategic plan to generate growth in the years to come. In five years, he stated, Comverse would be a whole new place - listed on the stock exchange, able to make investments, a company in which employees could take pride.

But Dahan has since quit. And it remains to be seen whether Comverse will meet its goals.

What do market players think about the company's renaissance?

Relisting on Nasdaq is critical for Comverse, they say, because that will regain the market's attention. Comverse has spent the last several years repairing damage, and by now should be perceived by everyone - from workers to suppliers to investors - as a company that has healed and is operating normally. All its future financial statements will be audited, as the last one was.

Avivit Mannet-Kalil, co-CEO of the Israeli arm of Oppenheimer, specializes in dual-listed shares and covers Comverse. She feels that relisting is a substantial change.

"Many institutional investors can't invest in companies listed on the pink sheets," she explained. But they will be able to do so once the company relists, as will investment vehicles that track indexes.

Relisting is technical, but it boils down to higher trading volumes in the company's stock, which most institutionals dumped when it turned out that Comverse had to restate results going back years.

Resumes pouring out

The company's rehabilitation has been painful. Since April, more than 1,000 employees have been fired, and even Dahan, the CEO, had to go. Those who were left had all their perks canceled and remain skeptical.

It's late in the day, averred a former manager, who left Comverse in 2010. "The company lost a lot of key people and a lot more are on the way out. It's hard to stop a wave like that ... The company has become unattractive in the employment terms it offers. Everybody is sending out resumes, including managers at every level."

He personally wouldn't come back unless offered a lot of money, he added.

The workers blame Dahan for the company's cash crunch, he said. "Before him, the CEOs were charismatic Israelis who lived in Israel and received a lot of respect in the organization. Then they brought Dahan from the U.S. to restore growth. He spent hundreds of millions of dollars on bringing the company back to the stock market, and that's what caused the liquidity problem."

Comverse couldn't publish financial statements for years after the backdating scandal exploded. Moreover, it had to take drastic steps after years of cash burn, including dramatic cutbacks in expenditures and manpower. But the former manager feels that during that time, the company made bad deals that hurt cash flow, just in order to show that business was continuing.

The company operates in four areas. Its core activity, generating half its revenues, is billing systems for telephony and content providers. A second area, in which the company has a 60% global market share, is value-added services for phone companies, such as SMS technology. A third area is cellular Internet (data traffic ) technology, and the fourth is services: training, support, installation. The company's customers are telephony, cellular and cable companies.

Its next challenge is the launch of Comverse1, a next-generation billing program that enables the consumer to be charged in real time, including for cellular Internet use. There is much potential in billing systems, said a market player: People are consuming more and more information, and billing them is a difficult but crucial issue for the service vendors. "Billing systems are gaining momentum, and Comverse is becoming a leader in converged billing," he said.

In 2010, Comverse invested 17% of its revenues in research and development, which is a lot for its field, he noted.

While rival billing-software company Amdocs targets the industry giants, Comverse carved out a niche among smaller companies, said Oppenheimer, the investment bank. Oppenheimer expects good things from the company, noting that it has a rich pipeline. By the second half of this year, the bank thinks Comverse may achieve positive cash flow. It could also sell its subsidiary Verint, which does completely different things.

Comverse is expected to recruit about 150 people for its billing section, given the rising demand for its wares, mainly Comverse1. It needs to be ready to meet the demand, the market source said.

Firing, and hiring

It's rational, perhaps, but making manpower contingent on demand creates uncertainty and hostility among the workers. For now, demand is beating expectations and the market is talking about Comverse hiring. But management has to identify long-term trends in order to avoid repeating past mistakes and to repair its image as a company that fires.

The company doesn't provide specific information about dismissals. Media reports have its work force at 4,000, of whom 1,500 are in Israel. Years ago, it had 6,000 workers, meaning it fired a third.

"About 10 managers out of 30 left in the last year and a half," said the former manager. Many went to Amdocs, AT&T and NICE Systems.

He claimed that more left than the press reported, because when people quit, Comverse didn't do anything to stop them: It had nothing to offer. It closed down the in-house gym, abolished lunch vouchers and day trips. It cut back from six buildings in Tel Aviv's Ramat Hahayal neighborhood to three, the ex-manager said. Recruitment under those conditions was difficult.

Thus this year, while firing hundreds for the sake of achieving equilibrium between expenditure and income, the company was also hiring for its billing division to meet rising demand, the market source said. Management is now working on restoring trust - and also perks.

Its cutbacks pared $50 million from operating costs in 2010. But the next phase will necessitate improving its deals.

Dahan's departure led to a reorganization in management. The new CEO (and chairman ) is Charles Burdick, who is one of the authors of the company's strategy. The market player for one has faith in the new leadership.

"There is a new spirit, but a process like this takes time," he said. "The trick isn't only to know how to execute strategy, but to know when to change it. After changes at the top, the new management has more flexibility and authority to make decisions and react fast."

But Mannet-Kalil disagreed: The market couldn't care less about the change in CEOs, she averred. "The new CEO isn't a rising star. He came from within the organization, and there's no anticipation of him becoming a Steve Jobs of Comverse," she said, adding that the reorganization plan produced no surprises.

The former manager, in contrast, was downbeat. People don't know Burdick, he said, and what Comverse really needs is an in-house CEO, not somebody abroad. Somebody the workers can see.

Meanwhile, the company is thinking of ways to keep the workers happy. Part of its plan is to restore subsidized lunches at a list of restaurants, long a status symbol in high-tech circles. It also means to restore prizes for excellent workers, including weekend vacations for those who make extraordinary contributions. The time has come to start celebrating the company's successes again, management feels.

But loyalty can't be bought with steak, the former executive said. The company has a hard row to hoe in healing its relations with its bruised workers.