Financial Watch : When Cable Giants Collide; Billing/OSS Seeing Longer Sales Cycles

In early July, telecom industry observers saw cable giant Comcast initiate a $44 billion hostile takeover of AT&T Broadband. This clash of cable titans would have given the federal regulatory agencies a field day, but AT&T wasn’t biting.

Instead AT&T shareholders refused the deal, and currently the company is talking to a number of other media heavy-hitters about the possibility of acquisition. The other suitors include AOL Time Warner, Cox Communications, Cablevision Systems, Charter Communications and Disney.

If AT&T accepts an offer from any one or a combination of these companies, not only will all parties have the feds to deal with, but they will also likely face back-office issues.

Just a day after Comcast’s offer was made public, and even before AT&T shareholders declined the offer, there was already concern about the billing side of the business, as CSG—which provides billing and customer care services for AT&T Broadband’s 17 million subscribers—experienced a 5 percent dip in its stock price.

AT&T Broadband is CSG’s largest customer, so naturally the prospect of an acquisition—especially a hostile one—would cause concern for the software company and its investors. For its part, Comcast does use CSG software but only for a very small percentage of its overall business. The company primarily relies on Convergys and DST Innovis for its cable billing.

But no matter what ultimately happens with AT&T Broadband’s cable business, CSG may not have so much to worry about. “The initial reaction was if Comcast were to buy AT&T Broadband, it would put CSG at risk,” says David Raezer, equity research analyst and vice president at Morgan Stanley. “Then, people said you can look at it in reverse, which is CSG has an opportunity to take more business at Comcast.”

In addition to possibly selling more licenses, CSG can also feel secure knowing they have a signed contract with AT&T Broadband. “As history has taught us, don’t bet against the contract,” says Doug Ashton, managing director at Bear Stearns. Ashton adds that service providers normally have to pay penalty fees if they back out of a contract. Also, migrating subscribers from an existing billing system to a new one can open up a big can of worms.

“Trying to get millions of subscribers off that system will be very costly and time consuming,” Ashton says. “The burden is really on somebody saying how that could happen cost-effectively. It’s hard to understand how taking people off CSG would generate cost savings.”

CSG’s contract with AT&T stipulates that its software be used for a minimum of 13 million subscribers. The worst case for CSG would be seeing no new business come its way as a result of a merger. But if the acquiring company relies more heavily on CSG software than Comcast does, then CSG ends up in the enviable position of being the biller for new subscribers.

Sales Cycles Lengthening

CSG may have an ironclad contract with AT&T Broadband, but the OSS industry as a whole is starting to feel more of the effects of the overall technology sector slowdown. Billing and OSS companies had been holding their own even as hardware manufacturers saw orders dry up. But the effects of the capital expenditure freeze by many service providers has finally trickled down to some of the software players as well.

“In the most recent month, I think we’ve seen a further degradation in carrier spending that is resulting in these [OSS] companies for the first time seeing their businesses negatively impacted,” Raezer says. He adds that OSS companies such as Micromuse, Comverse, Amdocs and others either barely made their second quarter numbers or stayed below their goal.

The lower numbers on the software side could be attributed to the service providers taking longer than usual to decide on a vendor and sign contracts. “I can’t tell if that’s slowing things down or there aren’t many smaller deals—meaning there are larger deals, and larger deals take longer,” Ashton says.

“In the aggregate, if my model is made up of large and small carriers and I lost the guys who make fast decisions, then my sales cycles would get longer,” Ashton says. “The question would be, are the larger guys taking longer than they usually have?”

The answer seems to be yes. Billing powerhouse Amdocs just barely made its second quarter goals, but the company stated in its second quarter results that it has experienced lengthening sales cycles. However, it has also stated that it’s not seeing any deferrals or slowdown in deals in which it is already actively engaged.

Business may currently be slower than the OSS vendors would like, but these companies will likely be among the first to benefit from any bounce-back in the telecom sector. “I think these companies will be the first to rebound,” Raezer says. “The incremental dollars that come back should go into this space first for the same reasons that they were the last to see the slowdown.”

Ashton adds that at this point of the telecom cycle, the market is looking for which companies will continue to be around. “There are still solid small companies evolving, but it’s much harder for the start-ups to get in,” he says. “If you develop something and it’s very solid, you’re more likely to take the approach that Geneva did, and sell yourself to someone who can really take what you’ve done and run with it.”

Other News
The market may not have completely bounced back for initial public offerings or new business, but billing and OSS companies seem to be able to conduct other significant deals. In July, MetaSolv Software announced it was acquiring Montreal-based Lat45 Information Systems for between $9 million and $11 million.

Lat45 creates geospatial software for the planning, design, and management of communications networks. What this means for MetaSolv is that the company gets the ability to map and graphically display networks and then take it one step further and overlay this information onto marketing and sales information. In this way, MetaSolv can offer support for market demand forecasting, network planning and design and service fulfillment.

Also on the M&A front, DSET announced in June that it had signed an agreement to merge with IP service provisioning vendor ISPsoft. Under the terms of the agreement, ISPsoft’s equity shareholders will own about 45 percent of the combined company. In addition to issuing an unspecified number of common shares, DSET will pay $1 million in cash, assume $1.3 million in debt and provide interim funding of $2 million. DSET also will pay another $1 million in cash or stock in 2002 if revenue goals are not met.