WIRELESS OSS SECTOR RISES AS BACK OFFICE ADVANCES

Convergys generates cash, cuts debt amid widespread decline

Buoyed by preparations for 2.5G and 3G buildouts, wireless service providers have moved the back office to the front of their budgets — making wireless OSS vendors one of the few rays of sunshine in an otherwise dismal market.

According to a report issued last week by Insight Research, wireless OSS spending will have a compounded annual growth rate of 20.6% through 2007, starting with a jump next year to more than $15 billion. The biggest change will be the need for RF planning and engineering tools, said Chris Whitely, project manager at Insight. The bulk of spending will be on billing and customer care, added RHK analyst Larry Goldman.

Unfortunately for the multitude of small vendors in the market, much of the near-term investments will go to European companies or larger U.S. vendors with an international presence, a result of Europe's lead in deploying next-generation wireless. But other factors are driving wireless OSS spending.

“If it was just about 3G, they would wait,” Goldman said. “Operators are making improvements in customer care that pay off now, but they are doing it looking ahead to 3G because they don't want to do it all over again.”

Despite the rosy projections, sector heavyweight Convergys is feeling “cautiously optimistic” about the second half of this year and beyond. “Going into this year, our expectation was for an economic rebound by the second half,” said Steven Rolls, chief financial officer of Convergys. “While we still expect the economy to improve we are a little less optimistic as to how strong that improvement will be.”

Convergys reported flat first-quarter earnings and lowered its earnings per share guidance slightly from its previous range of $1.57 to $1.65 to between $1.53 to $1.58. Its strategic direction hasn't changed. “Despite the challenging economy, we remain committed to our long-term strategy,” James Orr, CEO of Convergys, told analysts last week.

And it's that strategy, and not necessarily the flat but solid earnings, that has the company buzzed. “We generated an enormous amount of cash and significantly reduced our debt,” Rolls said. “That's great, and it creates shareholder value, but the strategic progress we made is perhaps most important.”

After investing more than $100 million over the last three years in a next-generation framework, Convergys last week introduced a new IP suite of solutions that features the integration of the Geneva rating and billing modules with new application modules for activation and mediation. Convergys also has been investing in its call center operations in anticipation of a growing outsourcing opportunity.

“The happy side to a really bad market is it causes our clients and people who have never outsourced before to think differently about outsourcing,” Rolls said. “With many of the large companies spending billions of dollars on customer service, it becomes less of a sacred cow.”

Whitely said customer care in a 3G world could be problematic for many service providers. “Once wireless data services are common, there will be a whole slew of customer care issues which don't really exist in the voice world right now,” he said.

Other wireless OSS companies are also starting to see improved outlooks. TTI Telecom recently won part of Hutchinson's OSS contract in the U.K. to provide network management solutions. The company hopes to extend its success to North America when that market catches up. “They are still trying to figure out what their strategy will be, but this is an opportunity for us to show what we can do for any technology,” said a TTI spokeswoman.