S A ADVISORY July - August 1997
New Buy Recommendation


Octel Communications


Octel Communications (NASDAQ - OCTL) is a world leader in voice messaging. Its worldwide leadership extends to over 70 countries and includes more than 40 million Octel mailboxes. Octel also is a pioneer in unified messaging, revolutionizing how people access and manage voice mail and e-mail communications. The company offers a broad array of products and services that make it simple to deliver, access, and exchange voice, e-mail and fax messages over worldwide communication networks. Octel's customer base includes businesses of all sizes, governments, educational institutions, telephone companies and cellular service providers. Founded in 1982 and headquartered in Milpitas, California, Octel currently employs over 3,000 people worldwide.

Octel has an installed base of over 50k systems in more than 70 countries, representing 40 million mailboxes. The company's top five customers average 285 Octel systems each. Octel counts among its customers six of the seven U.S. regional Bell operating companies, all major Canadian telcos and 130 additional service providers in 25 countries.

At present international sales represent 29% of revenues. Due to an unexpected software delay (namely, the upgrade to its Sierra computing platform) the stock had tubed to the level at which we had initially recommended it. On June 11, 1997, OCTL announced it had begun shipping upgrades to its system for both the Overture and Sierra line of voice messaging systems. Some recent headlines:

  1. Opens its Asia-Pacific Headquarters in downtown Singapore.
  2. Contact to supply voice messaging systems to Japan's Digital Phone Group for use in DPG's cellular network.
  3. Order to supply PCS voice messaging systems for Korea Telecom Freetel (valued at $14 million).
  4. For complete corporate updates, news releases, visit OCTL on line @ http://www.octel.com

The explosion of popularity of voice mail in the US and overseas among corporations and institutions and the growing interoperability of telephone and data networks translate into a requirement for specified computer systems that can efficiently process voice mail. OCTL's products and services enable people to send voice and fax messages to each other and have their telephones and fax calls answered by a voice mail system. OCTL is the largest worldwide supplier of voice processing hardware and software technology, with estimated revenues exceeding $630 million in FY 1997. Its product line is extensive and includes: computer modules, boards and software sales to customer users; and high-capacity, free standing computer systems sold to telecommunications service companies. OCTL is also a participant in the voice messages outsourcing industry.

We expect OCTL in fiscal 1998 to report earnings per share of $1.30 from 1997's depressed estimated EPS of $1.00. Revenue growth should rebound, aided by new products and a continuing strong service income gains. An estimated revenue improvement of 19% is likely, 16 - 17% excluding the deferred revenue. Profits will increase at a faster rate than revenues reflecting an uptick in gross profit margins and in improved expense ratio.

When we first recommended OCTL @ $16.00, it was a steal - now at $23.00 some of the bargain is gone short term, but long term, this company is the premier leader of the pack and deserves a higher multiple. The company has a huge cash hoard, no debt at all, new products being developed, as well as currently being introduced, dramatic growth in the international arena, insider purchases, new and seasoned management team and really not very expensive when one considers PE, PSR, P/CF and P/B.

OCTL, in our opinion, even at current levels, deserves a serious look. It surely would round out a diverse well managed portfolio. We will monitor OCTL in our 900# model portfolio for percentage gain performance.

Broker Contact: 1-800-453-9408 - Greg Nelson.

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Current Price (July 9, 1997)
Select Financial Data
1996A 1997E 1998E 1997A 1996A
Revenues 9.75mil 13mil 14.5mil 17mil -22mil
Net Income/ sh (375K) (3.1mil) 165K 1,000,000 -1,914,000
Shares outstanding: 53 million fully diluted
Long term debt: 0
Cash & Short term investments:
Book Value:: $91 million as of March 31, 1997
Recommendations: 10 firms follow OCTL - 9 rated it a BUY - on a one to five (1=strongest buy; 5=strong sell) the overall consensus is 1.9.
Insiders: heavy inside buying during second quarter of fiscal 1997 Price to Sales: 1.94
PE Estimate: 17.6x 1998 est.

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Copyright © 1997 S.A. Advisory