Big Billing Companies Grow, Smaller Players Suffer
By Jeanie Stokes
from the May 21, 2001 issue of Broadband Week
Your parents were right. It never hurts to have steady work when times get tough. The current economic slowdown has hurt some smaller billing/back office companies while more established players are sailing along, thanks to deeper pockets and established customer relationships in the more recession-proof pockets of the telecommunications business such as broadband services.
Portal Software Inc., which provides software to manage next generation communications and electronic services, this month scaled back its first-quarter revenue projections and said it suffered a larger net loss than it expected earlier. Cutting jobs and closing buildings are on tap as Cupertino, Calif.-based Portal aggressively cuts costs in the wake of a greater-than-expected global slowdown in spending by communications companies.
It's a different scenario in Denver, where cable television billing industry leader CSG Systems Inc. has boosted its 2001 earnings per share outlook, partly because of its first quarter performance when net income jumped 33 percent to a record $27.1 million. The company also sees its 2001 revenue rising to as much as $495 million, from $399 million in 2000.
The dichotomy may illustrate the current billing and back office business in a nutshell. Some of the newer billing sector players, like Portal, don't yet have enough business to support their day-to-day operations, says analyst Marianne Wolk at BancBoston Robertson Stephens.
There's another big difference: Portal relies on one-time software sales while CSG gets most of its revenue from providing outsourced services on long-term contracts which create a steady stream of monthly recurring revenue.
"Clearly in the current economic environment, (Portal's) business model, which requires them to sign new deals each quarter to market software, is less attractive," Wolk says.
But there's plenty of opportunity for business. Billing and back office operations at telecom companies are in a transition, thanks to the impact of the Internet, e-commerce and competition. Mergers and acquisitions have created a need for consolidation of multiple, often incompatible systems that record transactions, provision and bill service orders, without losing existing data.
At the same time, consolidation--especially in the cable industry--has shrunk the number of potential customers, while creating scale that helps boost profitability for billing businesses.
The big guys
Israel's Amdocs Ltd., Cincinnati-based Convergys Corp., DST Innovis and CSG are some of the 900-pound gorillas in the billing business.
CSG says it handles about 40 percent of the cable TV bills that go out each month in the United States, and about half of the direct broadcast satellite statements.
Convergys has about a 30 percent share of the cable business according to Yankee Group estimates, but specializes in wireless voice. About 40 percent of all cellular calls and 70 percent of all PCS calls billed in the United States go through Convergys' data centers, says Randy Mysliviec, vice president of global marketing.
DST Innovis holds about a 35 percent cable market share and Amdocs counts more than 100 of the world's largest communications companies among its customers, including every major U.S. incumbent local exchange carrier and virtually all of the largest wireless carriers.
Unlike Portal, which got about 40 percent of its revenue from now financially distressed DSL providers, the big guys didn't venture as much into handling accounts from the dot.com and competitive telephony realms. For example, newer Internet Protocol and broadband businesses provide less than 10 percent of revenues at CSG and Convergys, says Yankee Group's Wolk. Amdocs customers included failed DSL provider Jato Communications and broadband wireless service Teligent, but their contribution is overshadowed by the likes of SBC, Verizon and BellSouth.
"They are clearly trying to amass a stronger position in these newer markets so that when they do start to become a much bigger part of carrier spending, they'll be there to capture that," she says.
The bigger billing companies also have enough money to invest in new technologies and products that will help them capture the growth in carrier spending when it occurs. Convergys spent more than $600 million in stock last month to acquire Geneva Technology, a British software company whose European telecom clients include British Telecom, NTL, ONE, Telewest Communications and Czech Telecom.
Besides outsourcing, the big companies license software to companies that want to run their own systems. Analysts say the slowing economy could see even more service providers outsourcing core activities such as billing, to keep costs down.
"Large incumbent telcos with giant legacy billing systems are discovering what emerging carriers realized immediately--it makes better economic sense to outsource billing," says Prudential Securities analyst Michael Turits. He estimates the worldwide telecom industry will spend at least $7.7 billion this year on third-party billing and telecom software and services. Spending by Tier 1 and Tier 2 carriers on billing "will be at or above last year's level," Turits wrote in a recent report.
The slowing of the economy has resulted in customers being required to do more with less. "They're being asked to roll out high-speed data, new interactive services, but being asked to do it with same size workforce," says Liz Bauer, CSG's vice president for communications and investor relations. "They're feeling true pain now."
It's the customer, stupid
The drivers behind the anticipated growth in the billing/back office arena are new services, such as digital video and high-speed data, and a new awareness of the need to be profitable. Most importantly, the telcos and cable companies used to a monopolistic environment have seen the light about the need for good customer relationships as a key in differentiating themselves from the competition.
Customer care and customer relationship management are "competitive imperatives" for service providers today, and many are beginning to move in that direction, notes a recent report from the Yankee Group. "There may be many missteps, but there is no looking back."
Billing company executives say the attitudes of their customers have changed in the last couple of years. Sales representatives are more likely to be talking to a customer's financial, operations and sales and marketing people than with the IT staff. The prospective buyers no longer need convincing that an efficient, pleasant customer experience is essential to their bottom line. And now they also want to know how a billing solution will let them mine their customer data.
Open architectures also have become increasingly important. Service providers don't want to throw out their existing systems, especially if they've spent millions of dollars on them. Today's telecom customer wants systems that increase efficiencies for their existing infrastructure, and there's less demand for greenfield implementations, says Amy Ward, director of marketing for the Americas at ADC.
Above all, customer companies are asking for billing solutions that are flexible and don't create new legacy systems.
Some companies are testing the bundling of various services with almost a full roll out to million of customers, and then changing the offer within a matter of weeks or months, says Bob McKenzie, vice president of strategic marketing at DST Innovis, which also serves the cable, telecommunications and utility industries. "They can't tolerate waiting six months to change the billing system."
They also want the ability to integrate a new product or system with other future enhancements.
"One of the hot issues is around the ability to bill and provision for content-based services. That still represents a challenge," says ADC's Ward.
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