Verso's Extreme Makeover

Lewis Jaffe, the new president and COO at Verso Technologies Inc. (Nasdaq: VRSO), has made a career of dressing up ugly brides (well, companies) and marrying them off.

At one of his last companies, PictureTel Corp., Jaffe took the CEO post in 2000. Within two years, the company went from losing $200 million a year to turning a profit and attracting a buyer, Polycom Inc.

Today, many are expecting Jaffe, who joined Verso in November, to lay out a similar rags-to-riches plan for weather-worn VOIP equipment maker Verso.

But has Jaffe still got more steak than sizzle? Jaffe, a director at Benihana, has been "a self-employed public speaker and consultant since August 2002," according to SEC filings. Jaffe replaces Gary Heck, who resigned the president and COO post at Verso in early November.

Whatever Jaffe brings, Verso could use some kind of boost. After back-to-back disappointing quarters, Verso’s market cap is dangerously low and its stock price has hung under one dollar so long that the company is at risk of being delisted by the Nasdaq (see VOIP Vendor's Stock Tanks).

A Verso release says it plans to “discuss the operational initiatives it has and will be implementing to streamline the company and increase revenue” on the call. The wording of the announcement suggests some management changes or staff reductions may be at hand.

“They will be introducing some new guys and changing up the management team a little bit,” predicts analyst Todd Smith of America's Growth Capital.

Smith says his firm predicted $20 million in revenue for Verso last quarter before the company lowered its guidance. Verso’s revenue for the third quarter of 2004 was $11.2 million, compared with $15.3 million in the year earlier quarter, and with $11.3 million in the second quarter.

Of particular concern is the company’s decreasing cash flow, which was reported at $10.8 million as of September 30, 2004, down from the $18.3 million reported June 30.

“The real issue with this company is their market cap,” Smith says. “It is hard to sell to large carriers with market cap that low.”

Expectations for the company were high, given the strong performance of the carrier VOIP equipment space in which Verso plays. So what is wrong?

The answer, according to Smith, may be simpler than some may think. Verso’s core product, which it purchased in an acquisition of bankrupt softswitch vendor Clarent in 2003, is not built for the carriers that are spending money on building out their VOIP networks now -- the large U.S. RBOCs.

“They just don’t have the features for Class 5, so can’t play for the U.S. carrier market for VOIP equipment,” Smith explains.

Verso’s focus has been the large international carriers in countries like China and India where telecom penetration is relatively low, Smith says. “They are kind of at the mercy of those carriers building out their networks for VOIP.”

But to international market carriers, Verso isn’t just another pretty (or ugly) face; thousands of the Clarent switches are already installed in carriers throughout the world.

“Those carriers are going to expand their networks for VOIP at some point, and Verso is banking on the idea that they will want to preserve vendor continuity and expand with Verso products,” says analyst Joe Noel of Pacific Growth Equities Inc.

Noel doesn’t anticipate much gloom and doom in the Verso conference call tomorrow. “I think what you’ll hear is a general update, but there will be no bombs dropped like the company being sold or anything like that,” Noel said shortly after a phone call with Verso officials.

“I think it will all be really positive; they will concentrate on the new [president] and what he plans to do," says Noel.

— Mark Sullivan, Reporter, Light Reading

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