Financial Watch : The Wild World of Internet Stocks Comes to Billing

Portal Software Inc. went public May, 6 offering 4 million shares at $14 per share which represent approximately 7 percent of the company. The company reported a loss of $17.1 million in 1998. Portal received $16.43 initially and the shares rocketed up to $44 dollars on the first day of trading. Next month Portal will be added to the BACC index. The stock settled around $30 per share, vaulting the companies market cap to 120 million. In addition, on May 12 Cisco Systems Inc. announced a stock purchase and strategic alliance agreement with Portal. Cisco purchased 3 million shares of Portal’s common stock valued at approximately $39 million, the companies said. In addition to the common stock purchase agreement the companies have also formed an alliance in which Cisco has designated Portal to be it’s strategic customer management and billing partner for data IP services. Cisco engineering and marketing will work with Portal to create systems that integrate Cisco Service Management (CSM) technology with Portal’s customer management and billing software, Infranet. The deal was not exclusive. “While Cisco’s investment was not new news, it caused retail interest (day traders) Portal’s stock. It was included in Portal’s registration statement it was not necessarily new news, just a media event, but nothing else. Institutional investors already knew about Cisco’s stake in Portal” according to Michael Turits, senior analyst, Prudential Securities Inc.

However, the day of the announcement Portal’s stock was way up ranging from $31-$58 a share and closed at $41. “A high profile customer base, and some nice endorsements from equipment suppliers-specifically Cisco-made Portal attractive”, says David Raezer, vice president of equity research at NationsBanc Montgomery in New York City.

Douglas Ashton, senior vice president for equity research at Jeffries & Co., says "Portal's valuation does not fit the normal valuation parameters set for the billing and customer care sector. Portal has portrayed itself more as an Internet stock or e-commerce play than as a billing company and thus has attracted an Internet type of valuation. As such, it's going to be hard to compare Portal to the rest of the companies in the billing group for comparative valuation purposes. Portal's success with this strategy is likely due to the open ended prospect for the growth in the number of potential customers in its target market and some of the other elements of the Internet and e-commerce dynamic. If the company's target market had been pure telecom carriers, the total target market and its growth potential are pretty well established and understood. The potential billing target market for ISPs, e-commerce and on-line service providers is in a sense unlimited at this point-which gets people excited about a Portal or companies like it."

Raezer believes that Cisco’s investment in Portal was a response to Lucent-Kenan. “Kenan had done some work in IP billing, and Lucent was interested in getting some pre-standard IP billing which was probably in part the thinking behind Lucent-Kenan. Lucent hopes to embed some of Kenan’s IP billing software into their hardware. And that would allow them to bill for IP services pre-standard which would help Lucent move the burgeoning IP data product which is where Lucent is weak and would help them in the ISP market.”

What This Means for the Future

“This will become the IPO strategy for other IP and Internet billers. They will position their deals in a similar way. The good thing for Portal is that they benefit from being the first one out. Portal’s big stock bounce following its IPO was also in response to an announcement that Cisco had taken a stake in the Company. "What many investors may not know is that this is not the only Company in the space that they have invested in." says Ashton. "Cisco has made investments in Portal competitors Solect and Belle Systems and they are working with just about every vendor in the space."

Ashton thinks that Portal's IPO and Cisco's investment changes the dynamics of the billing and OSS deal market. "It says to companies who maybe aren't turning profits or that don't have $50-$100 million in revenue that you can go the IPO route. However, if you're going to do that you've got to be tied into the open-ended Internet or IP billing markets. You have to position yourself just right. With Portal, for instance, they have had real success, have real customers, have a brand name, have good partners and a coherent business model. The only question will be execution, but that's no different than with any company. Two years ago and even a year ago you couldn't take a billing company public with the kind of financial model they have. This deal changes everything and least under the current conditions in our capital markets.

Portal will be reporting their quarterly results next week.

NationsBanc’s Raezer also believes that there will be other similar alliances in the near future. “It is logical that other equipment suppliers, like Nortel/Bay will partner/acquire IP billing functionality to respond to Kenan-Lucent and Cisco-Portal. Cisco will also have to respond, at least from a partnership standpoint, in areas other than just IP billing-billing for other services. I would expect to see continued partnerships between equipment suppliers and software supplier. IP billing in particular seems to be especially hot from an equipment provider standpoint. We are just in the beginning of seeing more consolidation in IP billing services and certainly there will be more partnering. This follows what has happened in virtually every technology acquisition/partnership growth phase.”

Billing Concepts Splits Apart

Billing Concepts’ Board of Directors approved a plan to separate its businesses into two separate public companies. The Systems and Software division will operate under an underdetermined corporate name, and the LEC Billing division will operate under the name Billing Concepts. The terms of various agreements between the proposed two entities have not been finalized, and the company anticipates that by Sept. 30, 1999, stockholders of Billing Concepts Corp. will receive a distribution of one share of the new company for each share of Billing Concepts Corp. owned. Billing Concepts said that the details of the distribution will be announced between June 15 and July 15.

Billing Concepts reported quarter operating revenue of $45.7 million, compared to revenue of $44.2 million for the same period in 1998. Net income for the quarter was $5.9 million, compared to 1998 reported net income of $7.4 million earnings per share were $0.16 compared to $0.20 for the same period in 1998. Operating revenue for the LEC Billing division was $37.8 million reported for the same period last year. The Systems and Software division reported $10.9 million in revenue, which is 72 percent greater than revenue of $6.4 million 1998.

Prudential’s Turits thinks that the split makes sense because they have two very different types of businesses. “The LEC business is slow growth with 5%-10% percent growth and it a strong cash flow business. The software business is high growth and will primarily be valued on a revenue basis because they don’t have strong cash flow in the near term. In fact, the software side will most likely not be significantly profitable in the near term.

Investors interested in the software business continue to come back and ask questions about slamming and cramming issues and the growth the LEC billing business.”

LHS Buys Priority and Restructures

LHS Group Inc. will buy Priority Call Management for 5.2 million fully diluted LHS shares, equal to about $162 million, company officials said. When integrated with LHS’ Business Support and Control Systems (BSCS), Priority’s Oryx platform will help LHS’ existing and new customers worldwide offer numerous differentiated services, such as prepaid calling, credit/debit card calling, enhanced messaging and one number, “follow me” services, LHS officials said. The functions will help LHS customers retain subscribers, increase revenue per subscriber, attract new customers and increase network usage. The Priority Call platform will also be offered as a stand-alone product.

In other news, LHS has restructured it technology group into two organizations-a research and development organization focused on main product development and a customer engineering group focused on customer delivery.

LHS’ internal reorganization that will not effect the financials, how things are recognized or expensed or billed all those things don’t change, the only thing changing is the orientation of the engineers, according to Raezer. “LHS’ engineers will work more on site doing specific customization work, whereas before the same work was being done by third parties. They’re are not going away from third parties people who used to be at headquarters or in some R&D facility are not out at the customer site and are doing work there. They’re doing the same work the difference is where they are located and what kind of contact they have with their customers.”

Amdocs Files for Additional Offerings

Amdocs Ltd. has filed a registration statement with the Securities and Exchange Commission for a proposed public offering of 20 million of its ordinary shares. Of the shares to be offered, 18 million will be sold by selling shareholders and two million shares will be sold by the company. The company and the selling shareholders will also grant the underwriters for the offering an over-allotment option for an additional three million shares. Goldman, Sachs & Co. will be the lead manager of the offering and BancBoston Robertson Stephens, BT Alex Brown, Lehman Brothers, NationsBanc Montgomery Securities and SG Cowen will be co-managers. The selling shareholders include the company’s principal shareholders, Welsh, Carson, Anderson & Stowe, SBC International Inc and Amdocs International Ltd., a private investment company. These shareholders will continue to hold more than 80 percent of their current ownership position in the company’s outstanding ordinary shares after the offering. In addition, the registration statement provides for a separate offering by a selling shareholder of up to 11.5 million ordinary shares (including an over-allotment option of up to 11.5 million shares) through an offering of hybrid equity securities know as TRACES (Trust Automatic Common Exchange Securities). The TRACES offering involves the formation of a trust that will issue the hybrid securities to the public. At their three-year maturity, the TRACES will be automatically exchanged for ordinary shares or, with respect to a portion of the TRACES, for cash at the election of the selling shareholder.

Amdocs Ltd. and Architel Systems have terminated their agreement of March 2, 1999 by which Amdocs would acquire Architel. The companies announced that they would continue to explore joint marketing and other efforts.