Billing giant Amdocs (NYSE: DOX) is readying itself to enter the cable company billing market, and focusing its efforts on Russia. The company’s main growth engines over the coming year are expected to be customer relationship management (CRM) contracts and the fixed-line telecommunications market, but the vision that Amdocs described to analysts for the coming two years does not include the Chinese telecommunications market.
A new field of endeavor, in which Amdocs is expected to go right into the top league, is systems integration. Two weeks ago, Amdocs announced that under its contract with Vodafone Hungary, it would also perform the integration for the entire project, including products from other companies. This marks Amdocs first step towards competition with the major integration companies.
Up until now, Amdocs has provided integration services solely for its own systems, while another company performed the integration with other systems. From now on, in projects in which Amdocs wins an integration contract, it will integrate all systems by itself, including those of other companies providing systems to the operator. Every such project opens the door for additional services and significantly boosts Amdocs’s revenue.
The important question is to what degree Amdocs plans to expand its activity in systems integration. The main advantage of this field is its potential for a major increase in revenue. While the revenue potential for billing companies is sufficient to make them medium-sized at best, integration companies such as Accenture (NYSE: ACN), KPMG, IBM (NYSE: IBM), Ernst and Young, Capgemini, and Datamat are large international companies.
Amdocs’s entry into the systems integration field also presents the company with several challenges, however. First of all, such a move could put Amdocs in direct competition with the systems integration giants. In the final stage of billing systems tenders, operators tend to choose the billing provider recommended by the systems integrator. If systems integrators regard Amdocs as a competitor for projects, they are liable to recommend its billing competitors.
Another challenge lies in the fact that Amdocs lacks the know-how and experience possessed by other systems integrators in integrating products made by other companies. Amdocs is therefore currently striving to walk a tightrope by taking part in integration projects, without upsetting the major companies too much.
One more challenge that Amdocs faces concerns resources. In order to integrate the products of other companies, Amdocs will have to recruit employees familiar with those products.
Focusing on Amdocs’s products
In a special “Globes” interview, Amdocs VP international marketing Michael Couture explains, “Integration is not new for us. Amdocs has always installed its systems in its customers’ networks. We have many years of experience in installing systems, and in the wide variety of services needed to a system into production. Now, we’re expanding the range of our services, but the services in question are still those centered around Amdocs’s products. If, during the course of a project, the customer believes that it’s worthwhile installing products from other companies, we’ll do it as part of the overall project.”
”Globes”: Aren’t you afraid that integration companies will now recommend your competitors’ systems to the operator?
Couture: ”The operators concentrate on choosing the most suitable product. They don’t leave the decision up to the integration companies. It’s true that we’re competing with integration companies in certain projects, but we cooperate with them in other projects. I don’t think there’s a significant change right now in our competition with integration companies.”
Systems integrators have more experience and know-how in integration projects. How do you plan to compete with them?
”I don’t agree that systems integrators have more experience. One of the reasons that our bid is based on Amdocs’s products is the depth of our know-how concerning our products. I think we understand our own products better than others do, and that gives us an advantage in integrating systems that include Amdocs’s products.”
What proportion of revenue do you expect to come from integration projects, compared with revenue from other services and from the sale of licenses?
”Revenue from integration will be included in the revenue from services item. We don’t disclose the distribution of revenue between different types of services.”
Going for cable
Another field that Amdocs plans to enter soon is billing for cable companies. From time to time, the company gives the impression that it is in no hurry, but the cable billing market is definitely in its sights. Several weeks ago, Amdocs completed due diligence for CSG Systems (Nasdaq: CSGS), a company dealing in cable company billing. Merger talks reached the most advanced stages, but were halted at the highest levels of Amdocs’s management. It is not clear at this point whether the acquisition has been ruled out, or whether the matter is still under low priority consideration.
The consideration given to the acquisition of CSG is no coincidence. CSG derives 30% of its revenue from billing for cable companies, and the acquisition would provide Amdocs with a red carpet entry into the cable billing market, in which CSG has the largest market share. The largest cable operators, including US cable operator Comcast Cable Communications, are customers of CSG. Despite all the advantages, however, Amdocs seems to have backed off from the deal.
Are you looking for other companies to acquire?
”The cable operators are currently switching to advanced video, data communications, and voice services, at very high speeds. In order to derive maximum benefit fro these systems, they need more sophisticated billing services than those they currently have. Furthermore, with the introduction of new technologies (telephony, video on demand, etc., H.G.), the cable companies are becoming telecommunications operators, providing a wide variety of services.
”We’re therefore definitely interested in the potential of the cable market, but these developments won’t occur overnight. At this point, it’s unclear how much time it will take before substantial demand begins for advanced cable billing systems. We certainly regard the cable market as promising, and as an important opportunity for Amdocs, but right now, it’s not an urgent priority. We still have the option of getting into the field either through an acquisition or through independent development.
”In our opinion, independent development of billing systems for cable companies will not require a radical change in our current product. Of course, we can still acquire a company.”
Is there any point in acquiring another company, when all the major customers in the field are working with CSG?
”There are several players in this field worthy of consideration.”
Unclear timing
At the Amdocs conference for analysts two weeks ago, Amdocs Management executive VP Eli Gelman said, “It’s a promising market, but the timing is not really clear. What is happening there the real reason is because the cable and broadband companies are moving into deeper plays: voice, Internet access, net access, data on top of plain old cable television services. A lot is happening.
”So things are happening and more competition is building up. That actually would be a reason for this company to require Amdocs applications; the complexities that we can handle. On the other hand, the pace of this change is not very clear. We assume that it will take a year to two years, so in the meantime we have two options. Either to make enabler, augment it, take CRM which has been installed in several cable and broadband companies, expand into new linear obligations and we have the if the time permits, we can build it. If you want to save time to market, we may do it through acquisitions.
”So, for sure we want to be in the cable industry for the next couple of years. Whether it is next quarter or next year, it’s still hard to predict.”
Concerning Amdocs’s entry into billing services for the financial sector, Couture says, “Amdocs is being very cautious about entering the financial sector. We’re seeing a lot of interest now in this field, and we hear from the banks about increasing demand for systems, but nothing is happening right now that leads to many projects. I can sum it up by saying that we’re still moving towards an involvement in the financial billing sector, and we hope our activity will lead to positive developments. Keep in mind, though, that our strategy is to focus on the telecommunications market. We believe that the telecommunications market still has a lot of growth potential.”
Entering OSS
Just over a year ago, Amdocs told analysts that it planned to enter the operations support systems (OSS) field by acquiring companies. Important elements in OSS systems include revenue assurance systems, IP provisioning systems, and IP mediation systems.
Revenue assurance is the Achilles heel of data communications networks for telecommunications operators. Revenue assurance problems cost Western European telecommunications operators 0.5-2% of their revenue from voice networks, while the loss in Asia and the third world can be as high as 8%. The switch to data communications networks is expected to exacerbate the situation by raising the proportion of lost revenue to 30-40%. This field is therefore currently considered one of the hottest and most critical in the billing market.
Are you interested in acquiring a company that has developed a revenue assurance system for data communications networks?
Couture: ”We announced that our strategy is to increase the extent of what we offer telecommunications operators. We’re looking for companies to acquire in that context.”
Another important element of OSS is IP provisioning. Sources inform “Globes” that while conducting due diligence for CSG in recent months, Amdocs also negotiated for the acquisition of New Hampshire-based Granite Systems, which developed IP provisioning technology and an inventory management system. The negotiations with Granite reached an advanced stage, but Telcordia Technologies eventually acquired Granite in early May for $100 million. It can be assumed that Amdocs was willing to pay much less.
Amdocs will now have to look for another company. Gelman says that the market for provisioning, inventory management, service quality management, etc. has important growth opportunities for Amdocs.
IP provisioning systems are considered complementary to IP mediation systems. The role of the IP provisioning system is to send remote automatic instructions to the elements of the network (routers, switches, servers, etc.), so that every change in the network takes place in real time.
Remote automatic access enables the operator to make changes in real time, such as changing the customer’s profile and diverting telecommunications loads from one router to others. The IP mediation, IP provisioning, and revenue assurance systems must work as a single system; otherwise, their capabilities cannot be fully utilized. If and when Amdocs acquires an IP provisioning company and a revenue assurance company, it will have to integrate them with XACCT’s IP mediation system.
Are you still looking for an IP provisioning company?
”I can’t respond to that. I can only say that we see an important opportunity in any field that will enable us to expand what we have to offer in the OSS field. It is very likely that this expansion will be accomplished through an acquisition.”
Directories
”We now have a very large market share in directories,” Couture says.
In a “Globes” interview, Amdocs VP finance and investor relations Thomas O'Brien said, “Amdocs is the leader in directories; we have many large customers in this field. We believe that the market will grow, although not rapidly. We have a number of customers and potential customers interested in expanding their purchases in this area.”
A look forward
Concerning the strategy that Amdocs presented to analysts, O’Brien said, “We believe that telecommunications operators are currently switching from a focus on services to a focus on the needs of the individual customer. Instead of concentrating on providing general services for all users, they are zeroing in on the specific needs of each customer, and tailoring services to them.
”Amdocs offers operators a unified platform, which enables the operator’s service representative to view on a single screen the entire spectrum of services that the customers receives: wireless, fixed-line, cable, broadband Internet, etc. Up until recently, each infrastructure had a separate database, and the customer’s particulars were kept in several databases. That made it very hard for the operator to view all the operations of each customer on all of the operator’s networks.
”The trend is away from a focus on managing service to an integrative management concept that focuses on the user. Operators are interested in integrating all their systems CRM, billing, management, and orders on a single platform. This combination provides a complete picture of all types of the customer’s activity on the network, and enables the operator to construct a more effective basket of services.”
At the Amdocs conference for analysts, Amdocs president and CEO Dov Baharav said, “CRM is one of the major catalysts for our growth. Another area was the awakening of the wireline company, moving to all data services, with a need to automate the ordering side of the business… It's not only that the revenue grew by 24.7%, but the EPS grew at the same period by 31%… Another factor for our success in the last year was the momentum with the existing customer,” Baharav explained. “Vodafone - we are evolving the relationship to be a strategic relationship. Vodafone is trying to change the way that they do business in order to create one brand, one customer experience, and few platforms. And we believe that we can take them to where they would like to be.
Regarding Amdocs’s vision and the way it plans to fit in with the changes currently taking place in the telecommunications market, Baharav says, “One of the main reasons for the growth of the company in the last year was the change in the market. Our market, the telecom market is going through transformation… Bell Canada offers you DirecTV service, wireless service, ISP service through Sympatico and wireline service in a bundled way. So, looking at the market, we see fast change in the way that the market operates.
”Suddenly, it's not only the dial tones that we heard there 10 years ago. Suddenly, a wireline carrier, for example, has to compete with cable companies that provide VoIP. He has to compete with wireless companies, has to compete with Blackberry, that are providing a voice over this device. And it’s not only that; there are new competitors here, like cable company and some resellers like Disney, that will offer a actually will operate the VNO and Sprint network. Suddenly they have to compete in a new area where they have to offer the new services.
”The subscriber has the choice today. He can chose the carrier, he can chose the services he wants, which he didn’t have five years ago. And carriers have to cope with the fact that the market is changing fast, that things are moving and actually every other day there is new technology, and each carrier and each player is facing tough competition. The way to compete now, the way to handle the choice is to create customer intimacy, to be able to hold the customer in the center, to understand the needs of the customer, to see the customer as the whole and being able to create relationship with the customer. And every carrier must have the system, the business processes, to cope with the changes and align all the resources in order to differentiate itself in comparison to the other competitors…
”So, what are the requirements that are created as a result of this change and this transformation of the industry. And let's take an example. One of the CSPs that we are familiar with conducted a trial, taking a guy that was supposed buy bundled services from this carrier. He spent six hours on the phone, made 21 calls, got seven acceptance letters, some of them with different logos, and four visits to his home, and that started the bundled service to the customer.
”So, if you are looking at a carrier like a Verizon, they would have today local service, long distance, wireless data content and they might offer even video like what SBC is doing with EchoStar. They operate in different [sectors] and as a result of it, the customer is not treated is not treated as one customer. They cannot gain customer intimacy, they could not have the agility and they cannot leverage their asset in order to create an advantage in the market. The solution is integrated customer management. Changing the way that operates - operators act.
”So, first of all, what is the customer intimacy? Creating the idea of one customer. And one customer means that you have a single view of the customer, that the carriers know all the time what services the customer is buying from the wireless, from the wireline, from the data, from the ISP -- what are the preferences of the customer and how the preferences of the customer are changing. One customer means that when you are ordering some bundled service, you can do it in one call, you are getting one letter with one logo, and one visit to your home.
”Actually, the carriers could conform to be one company, so when you are customer of Vodafone living in England and you are traveling to Romania you would still be able to get on your voicemail and e-mail by hitting the same keys, having the same experience everywhere. You will be able to pick up the phone and call Bell Canada and get all the services easily - DirecTV, the express view or with Simpatico, ISP or wireline and long distance or wireless with the same cost. For that carrier will have to change the way the way they operate - the system, the business processes, maybe align the organization, make everything simpler. In order to be successful in this environment, they need to build the customer intimacy, the agility, and the reliability, which means they have to place the customer in the middle. And they have to engineer the system in order to create the agility, they have to engineer the system in a different way.
”Just thinking about a large carrier that have maybe ten million subscribers. They might have hundreds of billing systems. They might have intensive ordering system off a CRM system. In order to be able to provide this one-customer concept and to have the short time to market, which is the agility that we are talking about, they need to engineer the system to be integrated, to be in a position that can face any new service with any new data model in a virtual timeframe. And in order to differentiate themselves, they have to leverage the assets that they have. So, if you are SBC and you have access to 40 million subscribers and maybe in the future much more, you would like to leverage the assets in a smart way, providing your customers with programming by EchoStar, with video-on-demand using the DSL, with games using a Yahoo, with bundling of the wireless and the wirelines and the long distance.
Russia in, China out
Regarding Amdocs’s opportunities in each of the telecommunications markets, Gelman says, “We started looking at Russia seriously three, maybe three and a half years ago. The reason we did that is we saw the market was actually starting to develop some competition, some mechanization. Some European companies... got into the Russian market. And the way the Russians consume communication is actually European-like in terms of consumption, in terms of complexity, of other properties.
”We decided to move into Russia. We built an office there, we built logos, a support team, Russian speaking people... and we developed a strong presence of Amdocs in Russia.
”Like Brazil 5 years ago, Russia today represents for us a normal profitability, normal way of doing business for us. So it used to be an emerging market, now it’s a normal market for us. It takes some time to get to stabilization, but that’s the way it is. So we feel Russia as a solid short-term prospect. We have nice business today, and we think we can expand it dramatically.
”As opposed to Russia, when we look at China, we’ve been looking at China for quite some time now, more than two years. The bottom line is that we did not find a way to make money in China. And we are a for-profit company, so we’re not going into China just for the fun of it. No doubt the potential is huge. You can see the numbers, you can read the summary. No doubt the potential is huge. But the cost of labor, and the complexity of the system, and their customer service basically, they don’t have customer service makes it such a way that we did not find a way a business model to go into China and make money.
”So, we keep on watching it. We have some strategic options. We have some all kind of ways to probe this market and trial it in more of a case. So, I am giving you Russia and China as two different examples. We are watching this emerging market. But, it’s not necessarily that we will run after them if it’s not fit into our strategy and into our ability to make money.”
Published by Globes [online] - www.globes.co.il - on May 31, 2004