Comverse Technology (CMVT) CMVT (MP): Met with mgmt; lowering ests; valuation intriguing but no catalyst

Analyst Comment Stock data Price performance 1M 3M 12M 52−week range US$26.93−6.82 Absolute −10% −26% −64% 4:14 AM − October 14, 2002 Yield 0.0% Rel to S&P 500 −2% −16% −40% Market Performer

Small−Cap Growth Capitalization Forecasts/valuation 2002E 2003E Price: US$7.11 Market cap US$ 1.3bn EPS* US$−0.37 US$−0.26 Latest net debt/(cash) US$−1373mn GSCOPE EPS* − − Free float 92% GSCOPE P/E − − Shares outstanding 187mn * May differ from US GAAP

We recently met with senior mgmt. at Comverse for a brief update on the overall tone of business. While we did not garner a lot of new information, our impression is that the overall tone of business remains very difficult. We currently estimate rev. of $158m for Q3 (ends Oct.) , down 12% sequentially, and while we think this may be achievable, we believe revenue will be roughly flat to potentially down over the next few qtrs. We are lowering our cal. ’03 rev/EPS est. to $650m/$−0.26 from $675m/$−0.19. Although we believe CMVT’s valuation should limit downside (net cash of $7.35/share) , we see no catalysts over the next few qrts. Further, uncertainty about timing a turn in the business or a return to profitability should limit near−term outperformance, in our view. COST−STRUCTURE STILL SEEMS TO HIGH TOO US. With recently announced headcount reductions to be complete in Jan. 2003, mgmt. is targeting a breakeven level of revs. at $190mn/qtr. (up from $160mn current run− rate) some time in 2003. Our current estimates do not show revenue rising above $165−170m through ’03, and therefore estimate losses and modest cash−burn for the foreseeable future. We believe that the current cost structure may prove to high relative to the stabilized level of revenue, given no foreseeable uptick in telco capex.

A VALUE STOCK, BUT CASH−BURN AND LACK OF A TURN IN BUSINESS ARE OVERHANG. CMVT currently has negative enterprise value given its $7.35/shr. in net cash, and we est. $6.50−$7.00 by end ’03. While this valuation should limit downside, and given CMVT’s strong balance sheet there may be longer−term value from current levels, near term we see no catalyst to move the stock higher. Moreover, with negative cash flow estimated for the next few quarters, investors may be concerned about where the cash balance may bottom.

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NO SIGN OF A PICKUP IN VOICE MAIL DEMAND. We believe that Comverse’s voice mail business continues to be under pressure as existing carrier customers are reluctant to add new capacity, and new customers are implementing systems slower than anticipated. Both long−time existing customers, as well as recently garnered new customers (such as Elan Zivotofsky Verizon) continue to buy in small increments and in a ’just−in−time’ fashion. Moreover [email protected] customers continue to delay implementation of new enhanced services or voice mail Jerusalem: 972−2 548 1530 upgrades. While there is some ’lumpy’ demand from existing voice mail customers for incremental capacity and upgrades, such customers continue to run their networks at very Shimon Levy high capacity utilization and are reluctant to add any new capacity above absolute current [email protected] usage needs. Jerusalem: 972−2 548 1531

Abe Finkelstein VOICE MAIL SHARE GAINS SOMEWHERE ON THE HORIZON FOR COMVERSE . . [email protected] Jerusalem: 972−2 548 1532

FOR IMPORTANT INFORMATION ABOUT ’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO Goldman Sachs THE END OF THIS MATERIAL, GO TO http://www.gs.com/research/hedge.html, OR CONTACT YOUR INVESTMENT Global Equity Research REPRESENTATIVE. Comverse Technology October 14, 2002

.BUT HARD TO KNOW WHERE. Management estimates that Comverse likely has roughly 60% of the global wireless/wireline voice messaging market (we concur with this estimate of market share). Most of Comverse’s key competitors (/Octel being historically most important competition.) in the voice messaging market have weakened over the past several years. We believe that virtually any NEW voice mail implementations (i.e. carriers that currently do not offer voice messaging−mostly in Asia and Africa) will likely be won by Comverse. In terms of competitive wins (i.e. replacing competitors’ legacy voice messaging systems at carriers), we believe there remain several large opportunities that Comverse can win over the longer term (e.g. Cingular, France Telecom, British Telecom, etc). HOWEVER, we do not see any large wins anywhere in the near−to−medium term that would significantly boost voice revenue. We believe that carriers are reluctant to make any decision on large replacement orders in the near/medium term. Moreover, we believe that Cingular−which longer−term should be one of Comverse’s most important voice−messaging replacement candidates−is not currently considering replacing their legacy voice system.

PRICING AND COMPETITION REMAIN ISSUES IN WIRELESS DATA. We believe that the contribution to Comverse from new areas of growth such as MMS, UM and voice activated services will be quite muted in the near/medium term, and therefore will not begin to offset the slowdown in the business until at least some time in 2H 2003. This is due to delayed implementations by carriers, and general delays in 2.5G/3G networks. Furthermore, it appears that in the early stages of MMS contract wins, Comverse’s competitive position has weakened with Ericsson, , and others all showing much stronger wins and likely substantially higher revenue contributions from MMS in 2002 and 2003.

PRICING PRESSURE IN BOTH VOICE MAIL AND SMS HAS LIKELY STEADILY INCREASED OVER THE LAST SEVERAL QUARTERS. We believe that new voice mail implementations (such as Verizon, and ATT wireless), have much lower price points per port than such deals 1−2 years ago. And although Comverse faces little true competition in voice messaging, competitors that remain incumbent at existing customers, continue to drive pricing down for replacement deals. In the SMS market, we believe there has been major price erosion over the past−year (we believe pricing may be down 85%−95% from year ago levels). Further, we believe that margins on new applications such as MMS may remain weak as pricing pressure remains intense.

Goldman Sachs Global Equity Research 2 Comverse Technology October 14, 2002

Goldman Sachs Research global coverage universe Distribution of ratings/investment banking relationships

90% Percentage of companies covered by the Goldman Sachs Group, Inc, within the specified category* 80%

70% Percentage of companies within each category for which The Goldman Sachs Group, Inc. has provided investment banking services within the previous 12 months 60% 54.98%

50% 91.30%

40% 39.10%

86.25% 30%

20% *The above categories are defined as follows: Buy = RL, TB and MO; Hold = MP; Sell = MU. Buy, Hold and Sell are not defined Goldman Sachs ratings and should not be construed 10% as investment opinions. Rather, these ratings are used 5.92% illustratively to comply with applicable NASD and NYSE 70.00% regulations. As of 9/30/02 Goldman Sachs Global Investment 0% Research had investment ratings on 2,028 equity securities. Buy Hold Sell Comverse Technology (CMVT) Currency: U.S. Dollar Source: Goldman Sachs Goldman Sachs rating and stock price target history As of September 30, 2002 140 140

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0 0 Mar 14 Aug 16 Mar 13 Jun 3 MO RL MO MP N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S 1999 2000 2001 2002 Source: Goldman Sachs Research for ratings and price targets; for daily closing prices.

Rating Covered by current analyst as of 9/30/02

Price target Not covered by current analyst

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The price targets shown should be considered in the context of all prior published Goldman Sachs research, which may or may not have included price targets, as well as developments relating to the company, its industry and financial markets.

Goldman Sachs Global Equity Research 3 CMVT: US$ 7.11

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