ECtel Cuts Forecast; Becomes a Target?

Israeli revenue assurance vendor ECtel has announced, with its Q3 results, less optimistic guidance for its annual revenues. The new forecast range for FY08 revenues is US$26M-28M, down from the previous guidance of US$29M-US$31M. Q3 quarterly revenues were US$7.1M, up 22% year-on-year and up 6% compared to Q2. Gross margin and net loss for Q3, whether accounted for according to US GAAP or the company’s preferred non-GAAP basis, were both the same as for Q2. Per GAAP, the operating loss for Q3 was US$2M.

With US$19.3M in cash and cash equivalents, marketable bonds and securities, ECtel has no immediate finance concerns. However, ECtel does need to turn a corner and become a cash generative business within the next two years. During the quarter, ECtel’s operating activities burned just over US$3M cash. The critical link between customer credit management and a vendor’s liquidity was underlined as trade receivables went up from US$8.8M to US$11.8M over the course of the quarter. On the flip side, there was a US$1.3M fall in the balance for other receivables. If ECtel can keep the level of debts owed by customers at a steady level, its assets can sustain the current approximate burn rate of US$2M per quarter for a couple of years, but not a lot longer.

Of more immediate interest is ECtel’s place in the stock market. Its NASDAQ-listed shares are trading at a historically low level, thanks in no small part to the recent economic meltdown. At around a buck per share, ECtel’s current market cap is fluctuating about the US$17M mark. That means the market cap is less than the tradable securities, cash and cash equivalents on its balance sheet. American investors Diker have been gradually building their holding in ECtel over the last year, and now owns nearly 16% of the firm. If a purchaser paid US$19M for the entire company, they could recoup all the costs from ECtel’s own cash and investments. That comes before putting any value on ECtel as a going concern. Consolidation with a business that could utilize ECtel’s customers, products and intellectual property would make a deal even more attractive. They say that this is the time when investors with money can buy some real discounts. In a depressed market, will somebody be tempted by ECtel?

Eric Priezkalns
Eric Priezkalns
Eric is a recognized expert on communications risk and assurance. He was Director of Risk Management for Qatar Telecom and has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and others.

Eric was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He was a member of Qatar's National Committee for Internet Safety and the first leader of the TM Forum's Enterprise Risk Management team. Eric currently sits on the committee of the Risk & Assurance Group. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.

Commsrisk is edited by Eric. Look here for more about Eric's history as editor.