PROFIT-LACED TELCO EARNINGS NO COMFORT TO OSS VENDORS

Carrier cost reductions bring revenue shortfalls for Convergys, others

The margins posted by service providers in their earnings calls last week may have given some cause to celebrate, but for software vendors like Convergys, which posted a 2% revenue increase over last year yet dramatically cut its forecasts, the lack of growth spells more dark days ahead.

Convergys' main competitors, CSG Systems and Amdocs, won't announce earnings until at least next month, but the Cincinnati-based billing and customer care provider served notice that, with wireless subscriber growth still leveling off and new investment uncertain, 2004 is looking no better than 2003.

“Communications companies are still managing their businesses with tight controls over operating expenses, capital expenditures and new services deployment,” said James Orr, CEO of Convergys. “Therefore, [they are] delaying decisions on new large billing systems and postponing customization work for their current systems.”

Billing companies, particularly large ones, are supposed to be better positioned than most vendors of operations support systems, according to analysts, by virtue of their role in collecting revenues and providing or interfacing with customer care systems.

Billing companies also are in a position to take advantage of providers' desire to bundle services, which they collectively attributed with protecting revenue despite declining access lines, a trend that will continue for the foreseeable future, said Patrick Kelly, analyst at OSS Observer (see story on page 6).

CSG, for one, sees potential there. “We are seeing carriers offer more bundled services, not only in an effort to increase profits, but also to increase customer stickiness,” said Darla Thompson, CSG's vice president of global software product management. “We see an opportunity to provide a configurable customer care system that will meet the need to offer multiple service lines without the need for multiple billing and customer care systems.”

Kelly forecasts a fairly modest, low single-digit increase in OSS spending for 2004. Despite its position in being able to take advantage of this modest increase, Convergys lowered 2004 guidance for its Information Management Group, of which billing is a part, by as much as 10% to 15%.

CFO Steve Rolls — who the company said last week will move to executive vice president of global customer management and employee care when it names current NCR CFO Earl Shanks as its new CFO effective Nov. 13 — said uncertainty surrounding Convergys' IMG group is the reason behind the lowered expectations. He identified four factors contributing to that uncertainty: the emigration of subscribers at Sprint PCS (which implemented a new, non-Convergys billing system), questions about when the market for new billing systems will recover, unknown investment in components and consulting services for existing customers, and pricing pressure.

“We expect a material decline in revenue and a continuation of delayed spending in billing systems worldwide and expect pricing pressures to intensify,” Rolls said.

Delayed spending also contributed to a warning by OSS vendor MetaSolv that its third-quarter revenue would be down about 20% to 22%. While the company had a delay in closing several deals that contributed to the warning, it indicated that carriers are indeed stalling their investments. MetaSolv will announce its results after the markets close on Oct. 29th.

Despite carriers' success in cutting the costs that led to profitable earnings, the biggest roadblock to selling them software solutions still is internal development.

“The RBOCs are laggards when it comes to commercial investment,” Kelly said. “Even in billing, you still have a couple of large ILECs out there doing everything on their own.”