Buying into OSS stories: Investors look for the IP angle

If you think selling the Brooklyn Bridge might prove difficult, try peddling a venture capitalist or a money manager on enterprise software. But the operation support system sector is different, right? After all, lately VCs seem to be over-filling the coffers of OSSs. Solect Technology Group received $33.5 million in private equity, then was bought by Amdocs for about $1 billion. This winter, Eftia OSS Solutions and NightFire raised rounds of $30 million each. And last fall, Xacct Technologies raised $21 million.

Outrageous? Maybe, if you are talking only about an OSS company. But to many investors, these outfits represent plays on the much anticipated broadband and IP services boom.

"I didn't invest in an OSS company - I invested in a company addressing the demand for broadband communications services," said Roger Strauch, chairman of VC firm The Roda Group, an investor in NightFire. The valuation placed on some of these OSS companies is modest compared with the future shareholder value they will create, Strauch said.

That appears to the sentiment among VCs and buy-side analysts. Without the prospect of a "holy grail" OSS on the horizon - the one that seamlessly integrates customer care and billing, provisioning, order management and network management - they're latching onto the next best thing: infrastructure for next generation services.

Gauging by the performance of public companies in the OSS space, private equity players are investing correctly. Two strong performers - Portal Software and Amdocs - have compelling IP stories. Portal provides billing and customer care software to Internet businesses, including ISPs, online content providers and telecom carriers' online divisions. Customers include Covad Communications, Deutsche Telekom and Palm Computing, and the company even is exploring the wireless data services market with Sweden's Telia and Finland's Sonera. CIBC World Markets analyst Hampton C. Adams recently set a price target of $115 per share.

"We consider ourselves an Internet infrastructure company," said Jack Acosta, Portal's chief financial officer. "We're built from the ground up to go after the Internet market and developed our product to be a very flexible, open platform."

Amdocs is not the pure software company that Portal is, but it still hopes to compete effectively with its purchase of Solect. Solect owned an IP-oriented front-end billing solution and 60 installations for ISPs, application service providers and broadband players, according to a report by Marianne Wolk, a principal analyst with Robertson Stephens.

Amdocs also is investing significantly in a commerce server for fixed and mobile e-commerce. Wolk recently raised her earnings per share estimates for 2000 from 80cents to 85cents, and for 2001 from $1.12 to $1.15.

Even MetaSolv Software, an older player in the OSS game, is moving in step with the IP services era, said Jim Janicki, president and CEO of MetaSolv. MetaSolv has extended its pure telephony model into the services and inventory of IP network elements, including management of IP addresses and ordering mechanisms for Web hosting and dial-up Internet access, Janicki said. "You have to have an IP story if you're going to be a long-term player - there's no question in my mind," Janicki said.

He added that service providers should be careful to grow with their customers' businesses and offer voice-switched services. "You have to able to do the traditional telephone stuff also," Janicki said.

On the competitive carrier side, increasingly the trend is to go with the top two or three vendors in each software specialty, said Greg Mycio, research analyst at New Paradigm Resources Group.

But don't expect that to slake investor thirst or entrepreneurial activity. "The shift to Internet-driven products like e-commerce and video-on-demand will place new demands on OSS systems that don't exist," Mycio said.