EQUITY RESEARCH INDUSTRY UPDATEJuly 20, 2009

TECHNOLOGY/COMMUNICATION SOFTWARE

Pay Attention to That Man Behind The CurtainNetwork Complexity and the Quest for Customer IntimacySUMMARY

In this brief, we explore the impact of network complexity and competition for customers on three classes of mission-critical telecommunications systems: Operations Support Systems (OSS), Business Support Systems (BSS) and Interoperability. We believe increasing network complexity and evolving customer preferences will accelerate capital flows into BSS (the domain of DOX, CMVT), OSS (where DOX and TTIL are active) and Interoperability (where SVR and NSR compete). OSS, BSS and Interoperability vendors often toil out of sight, cloaked by a curtain separating user experience from the telecom engine. We urge investors looking to leverage telecommunications evolution to seek out hidden opportunities by peeking behind that curtain.KEY POINTS s

BSSs are the systems closest to and interacting with customers. OSSs are deployed to manage telecommunications networks, and interoperability systems facilitate communication between diverse telecommunications systems. These three system classes, interconnected and interdependent systems, are integral to the provision of telecom services. As the march of technology expands the number of devices accessing telecom networks, and as consumers' expectations for performance rise, network complexity is driving demand for BSS, OSS and interoperability solutions and accelerating the flow of capital toward providers of these solutions. Our favorite names in the BSS space include DOX and CMVT. In the OSS space, DOX takes top marks, and in the interoperability segment, we rank SVR highest. In the closely related contact center space, we give high marks to NICE and VRNT. This report was inspired by our colleagues' paper, "The Genie Is Out of the BottleApplications Separating from the Network," 6/11/2009, which explores network-centric computing and industry segmentation. We also lean on the intellect of Oppenheimer's Semiconductors and Components team for guidance related to the implications of semiconductor technology advances. OSS, BSS and Interoperability companies likely to attract new capital often toil in relative obscurity behind the curtain separating user experience from the telecom engine. We urge investors to pursue hidden opportunities by peeking behind the curtain.

s

s

s

Shaul Eyal 212-667-8411Shaul.Eyal@opco.com

Hugh Cunningham 212-667-7082Hugh.Cunningham@opco.com

s

Manish Hemrajani 212 667-5407Manish.Hemrajani@opco.com

Oppenheimer & Co. Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. See "Important Disclosures and Certifications" section at the end of this report for important disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Key Risks to Price Target" sections at the end of this report, where applicable.Oppenheimer & Co Inc. 300 Madison Avenue 4th Floor New York, NY 10017 Tel: 800-221-5588 Fax: 212-667-8229

TECHNOLOGY

Table of ContentsACKNOWLEDGMENTS.................................................................................................................................. 3 INTRODUCTION: PAY ATTENTION TO THAT MAN BEHIND THE CURTAIN: ............................................ 4 THE MAGICAL MACHINERY OF TELECOM (AND SOME COMPANIES KEEPING THE WHEELS OILED) ............................. 4 IT WAS THE BEST OF TIMES, IT WAS THE WORST OF TIMES .................................................................................. 5 2007: LAISSEZ LES BON TEMPS ROULEZ! ....................................................................................................... 5 2008: ANNUS HORRIBILIS .............................................................................................................................. 5 BSS: BUSINESS SUPPORT SYSTEMS ........................................................................................................ 7 KEEP YOUR VENDORS CLOSE, BUT KEEP YOUR CUSTOMERS CLOSER. ............................................................... 7 EXHIBIT 1: TELECOM CARRIERS ESTIMATED EXTERNAL BSS SPEND 2009-2013 ($BILLIONS) ............................. 8 EXHIBIT 2: KEY BSS VENDORS ...................................................................................................................... 8 SPOTLIGHT: AMDOCS (DOX, OUTPERFORM) ................................................................................................... 9 TECHNOLOGY SPAWNS A STRUGGLE FOR MIND SHARE .................................................................................... 9 SECRET OF A HEALTHY CUSTOMER RELATIONSHIP: THE CUSTOMER IS QUEEN ................................................ 9 "THAT'S W HERE THE MONEY IS": BEHIND THE STRUGGLE FOR CUSTOMER INTIMACY: .........................................10 FIRST CONTACT: BSS MANNING THE FRONT LINES OF THE BATTLE FOR THE CUSTOMER ....................................10 SPOTLIGHT: NICE SYSTEMS (NICE, OUTPERFORM) .......................................................................................11 SPOTLIGHT: VERINT SYSTEMS (VRNT, OUTPERFORM .....................................................................................11 LESS QUIET ON THE W ESTERN FRONT: CRM OUTSOURCING MAY BE SLOWING ................................................12 SPOTLIGHT: COMVERSE TECHNOLOGY (CMVT, OUTPERFORM) .......................................................................12 SPOTLIGHT: CSG SYSTEMS (CSGS, PERFORM) ............................................................................................14 A STOCHASTIC SAUNTER DOWN TELECOM LANE ............................................................................................14 OSS: OPERATIONS SUPPORT SYSTEMS..................................................................................................17 EXHIBIT 3: W ORLDWIDE OSS REVENUE 2006 2013 ($BILLIONS) ..................................................................17 EXHIBIT 4: SELECTED OSS VENDORS............................................................................................................18 EFFICIENT NETWORK HYPOTHESIS: THE SECRET IS IN THE OSS ......................................................................19 SOME THAT DOES NOT GLISTER IS GOLD .....................................................................................................20 CLEAR AND PRESENT DANGER: SECURITY RAISES ITS PROFILE .......................................................................21 THE BREAKUP: APPLICATIONS AND THE NETWORK GO THEIR SEPARATE W AYS .................................................22 THE SUM OF ALL FEARS: CARRIERS RESIST COMMODITIZATION .......................................................................22 INTEROPERABILITY .....................................................................................................................................25 TOWER OF BABEL 2.0: INTER-OPERABILITY RECONCILES A CONFUSION OF PROTOCOLS .....................................25 EXHIBIT 6: KEY INTEROPERABILITY VENDORS .................................................................................................25 SPOTLIGHT: SYNIVERSE TECHNOLOGY (SVR, OUTPERFORM) ..........................................................................25 W HAT WE HAVE HERE IS FAILURE TO COMMUNICATE ......................................................................................26 APPENDIX 1: BILLING PRIMER ...................................................................................................................28 APPENDIX 2: OSS FUNCTIONAL FRAMEWORK ........................................................................................30 APPENDIX 3: BSS FUNCTIONAL FRAMEWORK .......................................................................................32 APPENDIX 4: NC COMPUTING WHAT IS DIFFERENT THIS TIME .........................................................34 NC Computing Happening Now ...........................................................................................................35 APPENDIX 5: SELECT COMPANY SNAPSHOTS (ALPHABETICAL) ..........................................................37 COMPANY SNAPSHOT INDEX ....................................................................................................................47

2

TECHNOLOGY

Acknowledgments Most important, thank you for considering our ideas ; we hope you find a nugget or two of helpful information in the following pages. We owe a debt to the authors of Oppenheimers report, "The Genie Is Out of the BottleApplications Separating from the Network" (June 11, 2009), and to Oppenheimers Semiconductors and Components team, for guidance related to the implications of semiconductor technology advances. In addition, we thank the myriad industry participants who were kind enough provide assistance and those experts whose work we reference. All errors, of style or substance, are our own. Shaul Eyal (212) 667-8411 Manish Hemrajani (212) 667-5407 Hugh Cunningham (212) 667-70821

1

And, for abundant alliteration, frequent footnoting, and rampant referencing, we beg your indulgence. Source: Pay Attention to That Man Behind the Curtain Oppenheimer & Co., July 2009.

3

TECHNOLOGY

Introduction: Pay Attention to That Man Behind the Curtain: The Magical Machinery of Telecom (and some companies keeping the wheels oiled) Arthur C. Clarke, author of the short story that inspired "2001: A Space Odyssey," posited that "Any sufficiently advanced technology is indistinguishable from magic." Indeed, many of today's most exciting telecommunications devices, the Apple iPhone, the Palm Pre, SlingMedia's Slingbox, deliver almost magical experiences. In the 1939 Adaptation of Baum and Denslow's "Alice in Wonderland," the Wizard, discovered behind the curtain, implored, "Pay no attention to that man behind the curtain." Many of the companies discussed in this brief are critical cogs in the telecom machine, yet their labors are cloaked from the casual observer. Such companies enable proper network functioning, manage customer service and billing, facilitate intercarrier communication and protect network integrity. Our favorite names in the BSS space include DOX and CMVT. In the OSS space, DOX takes top marks, and in the interoperability segment, we rank SVR highest. In the closely related contact center space, we give high marks to NICE and VRNT. We suggest that investors seeking profits from telecom evolution pay attention to the firms toiling behind the curtain.

4

TECHNOLOGY

It was the best of times, it was the worst of times

2007: Laissez Les Bon Temps Roulez! During 2007, the rise of data services ranked among the happier developments for telecom players. Data services promised to recruit new customers and to provide new revenue opportunities, which promised new opportunities for BSS and OSS vendors. The good times were set to roll, and as Elisabeth Rainge of IDC 2 writes: In 2007 OSS/BSS vendors, like other telecom infrastructure suppliers, were caught up in the initial euphoria of successful mobile data and content-based entertainment services. Creating or modifying service delivery platform (SDP) strategies, expanding rating and billing mediation capabilities or otherwise showing alignment with revenue growth strategies, especially through value-added services, was the top marketing priority. 2008: Annus Horribilis And then, things fell apart. The rising panic of 2008 extinguished the euphoria of 2007. The US housing sector imploded; the financial sector stumbled, and dispirited consumers clutched pocketbooks close. As telecom customers succumbed to a macro-economic onslaught, service providers instinctively moved quickly to reduce capital and operating expenditures. Service providers postponed, cancelled or scaled back BSS and OSS projects. BSS/OSS sales cycles stretched out as new gatekeepers appeared in the purchase approval chain, and vendors found calls unreturned. This Too Shall Pass; Value Proposition, Bowed, but Unbroken: OSS/BSS vendors value proposition: that strategic deployment of effective BSS and OSS reduces operating costs and enables new revenue opportunities remains valid despite economic turmoil, tactical (i.e., short-term) reductions in carrier spending. The Bottom, Are We There Yet? We do not know if the global economy has reached its cyclical nadir; however, our recent checks suggest that in contrast to the gloomy sentiment that pervaded the early months of 2009, sentiment has improved among our channel contacts. In fact, our most recent conversations reveal that BSS/OSS vendors are getting calls returned, and potential customers are kicking the tires even if they are not quite ready to ride. Buttressing our confidence in our channel-level intelligence, Oppenheimers Communications Technology team recently improved (increased) their estimate for 2009 global carrier capital expenditures. That team now expects 2009 capital expenditures for the 33 largest carriers, covering roughly 70% of global carrier 3 capital expenditure, to decline 4.9% compared to 2008, a meaningful improvement compared to their prior 4 expectation for a decline of 6.5%. BSS/OSS: Complementary, Intertwined Systems OSS and BSS are complementary, interconnected classes of systems; the OSS/BSS structure of our paper is primarily to distinguish each classs respective role in the ecosystem. We believe that vendors serving either system class will seek to expand capabilities within that class. Furthermore, we believe that vendors will attempt to enhance their offerings by developing capabilities in both OSS and BSS.

For BSS/OSS, Telecom Advances Up the Ante We believe that the advent of 4G networks will spawn a host of enterprise and consumer services. Effective delivery of these services will require advanced OSS, and generating revenue from these services will require advanced BSS.

2 3

2008 OSS/BSS Deal Trends, October 1, 2008. Elisabeth Rainge, www.idc.com. 2Q09 CapEx Tracker, May 25, 2009, Oppenheimer & Co. 4 1Q09 CapEx Tracker, February, 2009, Oppenheimer & Co.

5

TECHNOLOGY

As Patrice McAree of Zoombak notes: The march of technology is laying waste to barriers that have historically protected market fiefdoms, forcing business models to adapt. In my own experience, telecommunications evolution is enabling compelling new services and sparking rivalry between players heretofore insulated from each other. At Zoombak we leverage technology to deliver the 5 greatest utility to customers rapidly and cost effectively . Patrice McAree, Chief Development Officer, Zoombak

5

Interview with Patrice McAree, Chief Development Officer, Zoombak, 7 July 2009

6

TECHNOLOGY

BSS: Business Support SystemsKeep your vendors close, but keep your customers closer. Don Vito Corleone , if he had chosen a career in Business Support Systems Defining BSS Closely linked to OSS, BSS are the systems processes closest to and interacting with end users. One function-based model identifies BSS constituent components as: Marketing/Sales Management Product Management Service and Resource Management Partner/Supplier Management Enterprise Management Appendix 3 presents a more detailed description of BSS functional areas. The global BSS market is large and fragmented. Although the largest carriers rely primarily on a small group of larger vendors, many carriers source BSS solutions from multiple vendors. In addition, a large number of smaller vendors compete to serve smaller carriers. Carriers spend significant amounts on BSS both internally and externally. From an external spend perspective, Gartner estimates that in 2009, telecom carriers will spend $14.2B on BSS solutions, with the lions share, $10.9B, targeting billing solutions. Gartner also expects carriers to spend heavily on internal billing solutions with 2009 internal billing 7 expenditures estimated at $12.4B . Exhibit 1: presents our estimate of carriers expected external BSS spend from 2009 through 2013.6

6 7

AKA Vito Andolini "Dataquest Insight: Carriers and Vendors Must Prepare For Further Consolidation in the BSS Market" Document #G00164864, 12 February 2008.

7

TECHNOLOGY

Exhibit 1: Telecom Carriers Estimated External BSS Spend 2009-2013 ($Billions)Worldwide Carrier BSS External Spend 2009-2013 ($Billions)

18.0

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

External BSS Spend

2009 14.3

2010 15.1

2011 15.9

2012 16.8

2013 17.7

Source: Oppenheimer & Co., Gartner and IDC

Exhibit 2 presents a selection of BSS vendors.

Exhibit 2: Key BSS Vendors Key BSS Vendors

Key BSS VendorsAlcatel-Lucent Cerillion Technologies Comarch Convergys Digital Route Evolving Systems Infonova IBM MaxBill Nokia Siemens Networks Peter-Service WeDo TechnologiesSource: Oppenheimer & Co., Gartner and IDC

Amdocs CGI Comptel CSG Systems ECtel Fair Isaac HP Intec MetraTech Openet Telecom Sofrecom Wisor Telecom

Aricent Clarity Comverse CVidya Networks Ericsson FTS Huawei LHS Mind CTI Oracle Subex ZTEsoft

8

TECHNOLOGY

Spotlight: Amdocs (DOX, Outperform)Share Price 15 July 2009 Shares Outstanding Market Cap Cash Equivalents Debt 2010E Revenue 2010E Non-GAAP Operating Margin 2010E Non-GAAP EPS $22.35 204M $4.6B $1.3B $451M $2.8B 18% $2.10

Amdocs is a leading provider of BSS and OSS services and software to telecom customers. Key Points Leading independent billing vendor 70% recurring revenue (40% managed services, 30% maintenance and support) Cutting-edge CES 7.5 suite is among the most advanced products capable of addressing the demands of next-generation telco/cable systems. Capable of executing massive projects Boasts a highly diversified product and service portfolio Maintains an extensive geographic reach Strong relationships with leading telecom and cable companies, including AT&T, Sprint Nextel, Bell Canada, and Comcast.Source: Oppenheimer& Co. estimates, Reuters market data

Technology Spawns a Struggle for Mind Share Semiconductor miniaturization has increased the processing power of electronic devices, spurred the integration of enhanced functionality and sparked an explosion in the number of telecom services. In our 9 view, users desire for constant connectivity combined with lower semiconductor costs , reduced power dissipation, and radio frequency technology advances should generate an exciting variety of devices and services. Even as they facilitate consumption of telecom services, electronic devices are evolving into valves that control vendors interaction with users. As the number of services vying for mind share rises, the value of the channel to the customer also rises.8

Secret of a Healthy Customer Relationship: The Customer Is Queen BSS, Business Support Systems, are the telecommunication systems that interact with customers (and hopefully keep them happy). BSSs are critical for managing customer relationships, for defining and maintaining brand identity, and for controlling the customer experience. Effective BSSs enable the execution of multiple mission-critical activities, including: 8

Billing preparation Bill presentation Order taking Call center management and customer service Customer satisfaction measurement Marketing

Consistent with Moores Law, or more properly Moores prediction. Semiconductor manufacturing costs per transistor continue to decline, consistent with Moores law; however, semiconductor manufacturing technology is rapidly approaching significant manufacturing challenges at advanced, nano-scale process technologies.9

9

TECHNOLOGY

"That's Where the Money Is": Behind the Struggle for Customer Intimacy: According to an old (and possibly apocryphal) story, serial bank robber Willie Sutton told a reporter that he robbed banks because "that's where the money is." While Sutton's moral compass may have been faulty, his powers of observation were apparently fully functioning. Enhanced customer access allows vendors to manage customer retention, to push product, and to extract tribute from third parties. Telecom firms are escalating efforts to create and maintain customer intimacy as an intermediate objective on the way to claiming wallet share. First Contact: BSS Manning the Front Lines of the Battle for the Customer Across the economic landscape, from consumer products to entertainment services, firms are increasingly focused on the opportunities created by each conversation, each email, and each interaction with customers. Systems that interact directly with users are critical weapons in the battle for customers, and as this battle quickens, customer-related processes such as customer service are being re-evaluated as strategic levers instead of cost centers. BSS systems play a fundamental role in determining a firms ability to communicate with its customers and to manage customer satisfaction. As Alan Dabrowksi of Optimal Healthcare Products points out: With the advance of communications technology, telecom service providers are integrating themselves into their clients most fundamental business processes, reaching and delivering value to customers. Execution is critical, and there is little room for error. 11 Someone is waiting around the corner to eat your lunch . Alan Dabrowski, Principal, Optimal Healthcare Products10

10

Firms on the front line provide a range of services from customer service call centers (e.g., Convergys) to workforce optimization software (e.g., Verint Systems, NICE Systems) and from telephone call recording services (Verint Systems, NICE Systems) to billing services (CSG Systems, Amdocs, Comverse). 11 From a July 10, 2009 interview with Alan Dabrowksi, Principal, Optimal Healthcare Products.

10

TECHNOLOGY

While NICE Systems and Verint Systems are not BSS/OSS vendors in a strict sense, they are on the front lines of their clients interactions with end-users, and they rank among our top picks. For those reasons, we spotlight them here.

Spotlight: NICE Systems (NICE, Outperform)Share Price 15 July 2009 Shares Outstanding Market Cap Cash Equivalents Debt 2010E Revenue 2010E Non-GAAP Operating Margin 2010E Non-GAAP EPS $23.75 61.6M $1.5B $530M $0M $644M 18.4% $1.75

NICE provides solutions that enable audio and video recording, workforce optimization, and data analytics to the enterprise and security markets. Key Points Enterprise, 75% of revenue, helps customers cut costs. Security, 25% of revenue, driven by anti-crime, anti-terrorism Approximately 40% recurring revenue. Highly capable management team

Source: Oppenheimer& Co. estimates, Reuters market data

Spotlight: Verint Systems (VRNT, OutperformShare Price 15 July 2009 Shares Outstanding Market Cap Cash Equivalents Debt Preferred 2010E Revenue 2010E Non-GAAP Operating Margin $10.19 33M $333M $187M $625M $293M $724M 14.2%

VRNT provides solutions that enable audio and video recording, and workforce optimization to the enterprise and security markets. Key Points Positive Catalyst: Resolution of long-running accounting restatement process should remove uncertainty overhang (parent has announced February 8, 2010 as expected resolution date) Expected parent restructuring could eliminate holding company discount Leveraged to workforce optimization, security intelligence, compliance recording. Witness acquisition in 2007 solidified VRNTs position as a major workforce optimization competitor.Source: Oppenheimer& Co. estimates, Reuters market data

11

TECHNOLOGY

Less Quiet on the Western Front: CRM Outsourcing May Be Slowing Recent signs suggest that with the elevation of customer service in the strategic arsenal, the eastward flow (via outsourcing) of customer relationship management operations may be slowing. Writing for searchtelecom.com, Michael Morisy notes that: Telecoms are recognizing that customer service is a strategic differentiator and not a cost center. As a result, companies like AT&T are bringing customer service jobs that had been outsourced overseas back stateside and into the company. Despite the recession, AT&T has a plan to "repatriate" 5,000 customer service positions to the United States. Three thousand of those jobs are already back in the fold. It's an unusual trend among daily announcements of layoffs, but the strategy might pay off in 12 reducing costly churn .

Spotlight: Comverse Technology (CMVT, Outperform)Share Price 15 July 2009 Shares Outstanding Market Cap Cash Equivalents Debt 2010E Revenue 2010E Non-GAAP Operating Margin 2010E Non-GAAP EPS $8.24 220M $1.8B $1.3B (ex. $0.2B of auction rate) $1B $1.9B 14.2% $0.84

Comverse Technology is the parent company of: Comverse Network Systems, a provider of software and systems, enabling network-based messaging and content value-added services, prepaid, postpaid and converged billing and IP communications; Verint Systems a provider of analytic software solutions for digital video security and surveillance, communications interception, and enterprise business intelligence; Ulticom, a global leader and innovator of service enabling signaling software for wireline, wireless and Internet communications; and Starhome, a leading global provider of mobile roaming technology and services. Key Points Positive Catalyst: Resolution of long-running accounting restatement process should unlock value (company has announced February 8, 2010 as expected resolution date) Positive catalyst: Likely capital restructuring should unlock value Leading software player with over 500 customers in 130 countries

Source: Oppenheimer& Co. estimates, Reuters market data

Telecoms now see customer service as differentiator, not cost center, searchtelecom.com, 12 Feb, 2009.

12

12

TECHNOLOGY

Hierarchy of Consumer Wants13: Consumer Preferences Guide Telecom Evolution

We believe the key consumer preferences shaping the evolution of telecommunications include customers desire for: 1. 2. 3. 4. 5. Constantly connected, mobile-enabled, high-speed service (mobility is increasingly important). Access to a complete menu of products and services A single, simple and accurate bill for bundled products A single, highly responsive point of contact with the service provider Low Cost

Enterprise Preferences Reflect Enterprise Threats We believe the key enterprise preferences shaping telecommunications include requirements for: 1. 2. 3. 4. 5. Constant connectivity High-speed service Remote IT management of mobile devices Enterprise class, remotely administered security Low total cost of ownership

BSS Vendors Help Carriers Take Careful Aim BSS vendors enhance their clients ability to develop customized, contextual offerings based on customer attributes such as home address, current location or user age. Customized offerings provide end-users with greater utility, and the ability to deliver this utility enables carriers to create new revenue opportunities while reducing marketing costs. For example, CSG Systems Quaero Customer Intelligence (acquired January 2009) leverages data from CSG Systems billing system and other sources to provide customers with information and strategies for improving subscriber retention and for refining marketing strategies. Similarly in November 2008, Amdocs announced the acquisition of ChangingWorlds, a provider of sophisticated profiling and personalization capabilities for the mobile Internet. Amdocs announced that it intends to expand the use of ChangingWorlds technology to three screens (mobile, PC and television) and will leverage its existing digital content and commerce offerings to enable service providers to support new revenue engines. Billions & Billions: The Connected Universe Is Large, Complex and Expanding Weve borrowed the title of Carl Sagan's essay collection to dramatize the ongoing, exponential proliferation of network devices. Myriad devices from mobile telephones to shipping trackers, from net14

13

With acknowledgement to Professor Maslow.

13

TECHNOLOGY

books to media-phones are increasingly tapping into high-speed, converged networks. In May 2009, 15 Amdocs referred to this dramatic growth, announcing : . . . support for service providers looking ahead to a not-too-distant future, when more than 1 trillion devices will be connected to the network, an industry phenomenon the company calls "Tera-play." Forecast to arrive by 2015, the Tera-play is being driven by growing demand for ubiquitous connectivity and connected devices. The related customer experience and bandwidth-consumption concerns will render service providers' operations exponentially more complex and potentially very costly. For example, already, support costs for smart-phones are 400 percent higher than regular phones, and their penetration is expected to climb from 30 percent today to 75 percent within five years.

Spotlight: CSG Systems (CSGS, Perform)Share Price 15 July 2009 Shares Outstanding Market Cap Cash Equivalents Debt 2010E Revenue 2010E Non-GAAP Operating Margin 2010E Non-GAAP EPS $13.68 220M $472M $120M $165M $513M 17.4% $1.58

CSG Systems provides software- and services-based solutions that process its clients billing invoices and manages clients interactions with customers across multiple media platforms. Key Points Strong cable/satellite pedigree with cable customers including Comcast, Time Warner Cable and DISH Network Processes data for 45M of its clients' subscribers and issues over 65M invoices monthly Services such as broadband, video on demand, and VoIP are providing CSGS with opportunities to establish new client contacts Quaero Customer Intelligence (acquired Jan. 2009) leverages data from CSGS's billing system to improve clients subscriber retention and marketing strategies. Has diversified into areas such as financial services, healthcare and utilities. Major non-cable customers include ADT, Brinks. Non cable revenue is ~15%.Source: Oppenheimer& Co. estimates, Reuters market data

A Stochastic Saunter Down Telecom Lane Cloud Billing Set to Rise 16 Recent increases in the adoption of cloud computing are turning a spotlight onto cloud billing systems . 17 IDC believes that cloud providers will likely turn to telecom billing providers for customized billing solutions

14 15

Billions & Billions, Sagan, Carl, 1998, Ballantine Books Amdocs Announced Support for the Six Core Competencies in The Age of Tera-Play, May 5, 2009, Amdocs press release retrieved from www.amdocs.com. 16 IDC forecasts that billing related to cloud computing is expected grow by a compound annual growth rate of 72% from $15 million in 2008 to $350 million in 2013.

14

TECHNOLOGY

as telecom billing providers have extensive experience providing flexible billing systems. Furthermore, modern telecom billing platforms are designed to be complementary to customer services activities. Mobile Search and Mobile Advertising We expect the quest for customer intimacy to shape mobile search and mobile advertising activity. 18 Gartner advises carriers to focus on enabling targeted and personalized advertising and to improve companies return on advertising investments, noting that: Today's carriers have a large base of customers, which can appeal to advertisers and marketers. It's increasingly important for carriers to develop customer intimacy, and focus their efforts on targeted and personalized advertising. Carriers could either use their network infrastructure to help advertisers achieve their new goals (by offering the network as an enabler), or try to make money from advertising directly, through new platforms such as Internet protocol television (IPTV) and mobile TV. Gartner, Advertising Opportunities for Carriers Hinge on Customer Intimacy The name of the game for any firm involved in mobile commerce is monetization, and innovative, new players are emerging to enable the conversion of customer interactions into cold, cold hard cash. As 19 Thomas Schulz of AdMob observes : As the expansion of the mobile web accelerates, stakeholders are wrangling for position, buffeted by complex forces including: users traditional reluctance to pay for content, the diversity of operators mobile web strategies, the increasing sophistication of mobile applications, and the rising popularity of social networks and mobile sites. Out of this complexity, creative, well executed, advertising funded models are emerging as the most compelling path to monetization. At AdMob we help our clients negotiate this path-torevenue rapidly and efficiently. Thomas Schulz, Managing Director EMEA, AdMob Toll Highway Ahead: Pressure for Monetization Will increase Barry Diller, entertainment and media veteran and Chairman of IAC, reportedly expects the Internet to become a paid system and believes that the barrier to a paid system is the lack of a simple, effective billing 20 system . Enhanced Billing Capabilities Could Open New Revenue Opportunities We believe there are probably innovative, new services that carriers have delayed offering because of billing system limitations. We believe advancements in billing systems will encourage the development of new products and services.

Key Trends in Consumer CommunicationsIn a review of trends affecting consumer communications, Gartner highlighted the following :21

17

Worldwide Telecom Cloud Billing 2009 2013 Forecast, IDC, May 2009. IDC Document #217313. Factors impacting the architecture of cloud billing systems include the number of subscribers served, the volume of transactions expected, usage patterns, and the complexity of service offerings. From a technical standpoint, implementation of a flexible and efficient rating engine will be a key factor for successful evolution of cloud billing. 18 Dataquest Insight: Advertising Opportunities for Carriers Hinge on Customer Intimacy, Gartner, 20 March 2007, Document ID Number G00147021 19 Interview with Thomas Schulz, Managing Director EMEA-, AdMob, 7/10/2009. 20 Quoted in a ZDNet article covering Mr. Dillers keynote address to the IAC hosted event, Advertising 2.0, June 10, 2009. Retrieved from IAC's media room, iac.mediaroom.com

15

TECHNOLOGY

The home will emerge as a key battleground. Consumer hardware and software vendors, Internet application providers and a few major carriers will intensify their focus on establishing "control" of the future home hub. Such control will play a major role in determining who can make money from new services sold into the home. Users will redefine services. This has already happened on the Internet, as people are now used to controlling their own service experiences. The next two years will see traditional carriers start to embrace this service ethos as well. The audience for consumer services will continue to fragment. While the consumer services market is converging with other markets at a high level, it is also fragmenting at the individual consumer level. Technology has enabled service providers and vendors to serve ever-smaller consumer niches. Providers will struggle to define a unified vision for video. Video will be a central element of service provider strategies. There will be no shortage of visions offered for the future of video, but the real answer will not emerge in the next two years.

For More on Billing Accurate telecommunications billing requires sophisticated hardware and software For more on billing, please see the appendix to this note and our July 28, 2008 paper, "Convergence: The Next Billing Frontier; DOX, CMVT and CVG Light the Path."

21

Market Trends: Reshaping Consumer Communications Services Markets, Worldwide, 2008-2009, 8 May 2009. Document ID Number G00157808

16

TECHNOLOGY

OSS: Operations Support SystemsThe day is coming when telegraph wires will be laid on to houses just like water or gas is, and friends will converse with each other without leaving homes." Alexander Graham Bell in a letter to his father, 10 March, 1876 In this section of our report we examine the role of OSS in the delivery of communications services. Exhibit 3 illustrates the size and growth of the OSS market.

Exhibit 3: Worldwide OSS Revenue 2006 2013 ($Billions)

Worldwide OSS Revenue 2006-2013 ($Billions)

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

OSS Revenue ($B)

2006 2.3

2007 2.5

2008 2.6

2009 2.8

2010 3.1

2011 3.3

2012 3.5

2013 3.8

Source: Oppenheimer & Co., Gartner and IDC

17

TECHNOLOGY

Need for Integrated Solutions Encourages Consolidation The OSS vendor space is fragmented, with a relatively small group of larger players serving larger carriers and a number of smaller players offering point solutions and serving smaller carriers. As Shira Levine points 22 out, operators preference for easier-to-manage integrated solutions, along with the challenges typically associated with selling to Tier 1 customers (long sales cycles, multiple levels of bureaucracy), increases the pressure on smaller independent software vendors that are less likely to boast product arsenals broad enough to compete effectively against larger players.

Defining OSS One function-based model divides OSS into fulfillment and assurance processes: Fulfillment Fulfillment refers to processes critical to implementation of a service order and delivery of the service to the end-user. These processes include: Workforce management Inventory Order management Activation Interconnection management Assurance Assurance refers to the processes critical to ensuring that services are delivered correctly and properly accounted for. These processes include: Performance management Fault management Service quality management: Please see Appendix 2 for a view of OSS from the perspective of service and resource management functions. Exhibit 4 presents a list of selected OSS vendors.

Exhibit 4: Selected OSS Vendors

Key OSS VendorsAlcatel-Lucent Comptel IBM Oracle TelcordiaSource: Oppenheimer & Co., Gartner and IDC

Key OSS Vendors Amdocs Ericsson NetCracker Subex

Comarch Hewlett Packard Nokia-Siemens Team Telecom International

22

No Future for One-Trick Ponies in OSS Realm, IDC, April 24, 2008

18

TECHNOLOGY

The Role of OSS With a place to stand and a lever, Archimedes would move the world; with OSS, carriers 23 can move virtual worlds. .

Efficient Network Hypothesis: The Secret Is in the OSS OSS, Operational Support Systems, refers to the software and systems employed in managing a telecommunications network. These systems are critical in executing a number of key functions including: Managing network inventory Preparing the network to provide new service Initiating service Configuring the network Managing faults

OSS capabilities are critical to service providers ability to flexibly provide a full roster of services. 24 Contributing to searchtelecom.com , Jeff Cotrupe compares the key functions of OSS to managing traffic on a highway: In today's packet-switched, content-driven, multi-network, multi-technology world, you have to manage the traffic that's screaming down that highway, ensuring that vehicles of every type flow smoothly to all destinations. That means supporting Voice over IP (VoIP), high-speed data, unified communications (UC), video, and an ever-growing lineup of digital media applications. Legacy systems were simply not equipped to keep up with the pace -- or to continue the auto analogy, if they were up to speed, they were built to recognize only one vehicle, while new ones rocketed past undetected and unmanaged Jeff Cotrupe, CEO of MarketPOWER AMDOCs Zeroes in on OSS In 2006, Amdocs acquired UK-based Cramer, and since then Amdocs has integrated and extended Cramers OSS portfolio while establishing partnerships with key industry players such as IBM and Cisco to deliver advanced, standards-based OSS solutions. In 2008, Amdocs acquired UK-based Jacobs Rimell Ltd., a supplier of fulfillment solutions for the broadband cable industry, extending its OSS capabilities and bolstering its position in the cable market. During its analyst day in February, Amdocs highlighted OSS as a key strategic priority for the company.

23 24

Admittedly, this analogy is a huge stretch; however, were partial to the classical philosophers. Tackling nextgen network OSS/BSS challenges, 9/12/2008, Searchtelecom.com

19

TECHNOLOGY

Some That Does Not Glister Is Gold

25

In the telecom sector, introduction of glistening gadgets generates excitement, and the market reception of new devices can dramatically impact the fortunes of players up and down the value chain, from chip maker to carrier. Arguably, OSS and BSS advances have even greater potential to shape customers experiences and 26 service providers prospects. As Mike Dano writes: . . . those who understand the operational support system (OSS) and business support system (BSS) space contend that some of the market's greatest innovations are set to spring from these pipes that represent the guts of the wireless industry.

Mobile Device Proliferation and Surging Data Traffic Magnify OSS Needs Our colleagues, the authors of "The Genie Is Out of the BottleApplications Separating from the Network," have written for several years that mobile data would ultimately be the driver of the golden age of networkcentric computing. They believe that network-centric computing is now entering that golden age, and they argue that the utility of fundamental computing resourcesprocessing power and stored datais enhanced by the ability to access these resources remotely. Appendix 4 delves into the intricacies of network-centric computing. Our colleagues also foresee accelerating emergence of smart-phones, net books, mobile Internet devices and mobile applications, and they expect increasing deployment of these devices and applications to be the major driver of communications industry growth over the next five years, with wireless data traffic potentially doubling every six months or so. Exhibit 5 presents our colleagues estimates for monthly smartphone data traffic from 2008 through 2015. Exhibit 5: Expect Explosive Growth in Data Traffic from Smartphone UsersMonthly Smartphone Data Traffic (TB)158,600 141,065 103,124 64,812 32,628 3,244 7,252 16,389

2008

2009E

2010E

2011E

2012E

2013E

2014E

2015E

Source: Oppenheimer & Co.

Telecom network performance is increasingly essential to the proper functioning of communications systems, and rising penetration of mobile devices is escalating the demand on telecom networks. Robust OSS platforms are critical for maintaining network availability, performance and integrity.

Partial rebuttal to the gold box inscription, The Merchant of Venice. The guts of wireless: OSS/BSS market on the brink of change, Mike Dano, June 15, 2009, www.fiercewireless.com.26

25

20

TECHNOLOGY

Competition Sharpens the Need for Robust OSS SolutionsCompetitive rivalry elevates the risk posed by malfunctioning systems. As a result, we believe operators will gravitate away from point solutions and the associated integration challenges and toward more advanced, integrated solutions.

OSS Demand Drivers We highlight some of the industry developments that should increase the demand for advanced OSS capabilities. Each of these developments either places significant demands on networks, leverages networks to provide important new revenue opportunities, or transforms networks in a fundamental way. Location, Location, Location: Location-based services allow carriers to increase marketing efficiency and to encourage point-of-purchase buying decisions. Video, Worth a Bit (or gigabit) More Than a Thousand Words: Video transmission increases bandwidth requirements by orders of magnitude and may represent the ultimate challenge for modern networks. E pluribus unum: Convergence takes many forms fixed/wireless, pre-paid/post-paid, voice/data, for example. In all its forms, convergence demands capable networks and effective network management tools. The IP Revolution Will Be Televised: IP-based networks are capable of delivering a greater variety of services (e.g., IP TV) faster and at lower cost. OSS vendors will face the challenge of enabling these services. 4G Networks, which are all IP-based, will dramatically increase the speed and flexibility of mobile networks. Although wide deployment is years away, 4G service is already available in select areas such as Baltimore, MD. In addition, Verizon is trialing Long Term Evolution, a 4G technology, this year and is expected to launch service in up to 30 markets in 2010. The Shape of Things to Come: The technological innovation that generated devices such as 27 28 smart-phones, net-books, mobile internet devices and media phones shows no sign of waning and will continue increase the performance requirements for networks and OSSs. Malicious Network Attacks: While the nature of future threats against networks is difficult to predict, it is likely that convergence will bring new security challenges.

Clear and Present Danger: Security Raises Its Profile Criminals, vandals and politically motivated combatants are increasingly targeting telecommunications networks with malicious attacks. On July 8, press reports revealed that government and commercial web sites in the US and South 29 Korea came under a coordinated denial of service attack on 7/4/2009.

For example, covering the 2009 Computex industry conference in Taipei, EEtimes.com reported on Media-phones, next-generation cordless phones with broadband connectivity allowing consumers direct access to internet media content via a color touch screen. EEtimes.com, Media phone builds more hype at Computex 2 June 2009. DSP Groups XpandR chipset targets this nascent market. 28 In Breathing New Life into Voice Service, http://download.intel.com, Intel quotes In-Stat figures sizing the media phone market at annual shipments of 48 million consumer devices and 10 million business devices by 2013. 29 Cyberattacks Jam Government and Commercial Sites in U.S. and South Korea, New York Times, July 8, 2009.

27

21

TECHNOLOGY

On July 5, 2009, USA Today.com reported escalating attacks on Twitter, the Web-messaging 30 service . On July 1, 2009, Billing and OSS World cited industry experts raising the alarm at an increase in 31 VoIP fraud . In June 2009 political protests in Iran, the Iranian government and dissidents took their battle to the 32 web. In April and May 2007, during a conflict billed by the New York Times as possibly the first cyberspace war, Estonian computer networks came under a furious and incapacitating month-long 33 attack after an Estonian decision to move a World War II statue. .

The Breakup: Applications and the Network Go Their Separate Ways (But they still have to work together) Our colleagues' note, "The Genie Is Out of the BottleApplications Separating from the Network" (June 11), 34 explores themes related to network-centric computing and horizontal segmentation . The writers argue that network-centric computing is driven by the separation of wireless networks and applications, and they predict that the migration to network-centric computing will drive explosive growth in data traffic and eventually lead to the breakup of vertically integrated service providers. The paper concludes that carriers will take multiple steps to retain control and to ensure that no single supplier dominates the network-centric computing operating system. The Sum of All Fears: Carriers Resist Commoditization We agree with our colleagues that telecom carriers are fearful of devolving into dumb pipes marginalized by the emergence of powerful hardware and e-commerce platforms. Hardware platforms (e.g., Apples iPhone, Amazons Kindle, Echostar/Slingmedias Slingbox) and e-commerce platforms (e.g., iTunes.com, Amazon.com, eBay.com) threaten carriers relationships with their customers by enabling third parties to potentially usurp carriers from their role as gatekeeper controlling access to the customer. OSS and BSS vendors are working to help carriers avoid this inglorious fate. Dumb Pipes, No!; Differently-abled Pipes, Yes! Even as mobile Internet usage accelerates, driven by improved user experience, faster networks and more transparent pricing, end-users are increasingly threatening operators competitive position by abandoning 36 37 operator portals for off-portal sites . We believe operators will work to avoid the dumb pipe fate by remaking themselves into differently-abled pipes that deliver utility to customers, to content and service providers and to advertisers.35

30 31

Cybercrooks descend on Twitter with spam, attacks, USA Today, July 5, 2009. VoIP Fraud Takes Its Toll, Kelly M. Teal, Billing & OSS World; www.billing world.com. 32 Hackers bring Iran protests to the Internet, Shaya Tayfe Mohajer, Associated Press, June 27, 2009. 33 In Estonia, what may be the first war in cyberspace, New York Times, May 28, 2007, Mark Landler and John Markoff. 34 In other recent telecom-related genie activity, the BBC reports that a genie has been sued for stealing mobile phones among other things, Saudi genie sued for harassment, BBC News, news.bbc.co.uk, 11 July 2007. 35 A phrase borrowed from our colleagues paper, The Genie is Out of the BottleApplications Separating from the Network. 36 IDC discusses this trend in its Openwave sponsored executive brief, A Smarter Pipe: Managing, Monitoring, and Monetizing the Mobile Internet, John Delaney, November 2008. 37 A threatening trend succinctly referenced by the neologism deportalization.

22

TECHNOLOGY

Effective execution of several activities is critical for the success of operators efforts to remain relevant. We 38 believe OSS and BSS vendors are uniquely positioned to help carriers carry out these activities: Optimizing Internet content for use on mobile devices Collecting data on customer activity Measuring the customer satisfaction with the Internet experience Collecting and analyzing data about customer surfing activity Correlating surfing activity with contextual data such as demographic and location information Compiling surfing data into standard metrics that permit third parties to measure marketing efficacy Compiling user preferences for marketing interaction and content targeting

Protecting against viruses, phishing and other malicious attacks

The Promise of Next-Generation OSS Next-generation OSS provides critical capabilities to service providers. We list some of these capabilities 39 here, with heavy reliance on Jeff Cotrupes paper:

Fast Service Initiation: The ability to instantly and accurately deploy any service to any customer over any network on any device. Automated Service Fulfillment: The ability to activate zero-touch process flows with minimal human intervention. Such automation allows carriers to slash capital expenditures and operating expenses while providing rapid execution and eliminating human error. Facilitate Customer Empowerment: The ability to empower users, allowing them to control services and features. Lower OSS Integration Costs: The ability to lower expenditures for the integration of OSS systems into existing environments. Eliminate Software Silos: The ability to rationalize software resources, eliminating OSS silos" created over time as deployment urgency outweighed integration concerns.

Get Smart: Perspectives on Pipes By choosing the smart path, carriers have opportunities to deliver utility to multiple constituencies in the 40 telecom ecosystem, including their own customers, content and service providers, and advertisers. Smart pipe-enabled carriers can:

38

Obviously, any activity involving the monitoring and/or collection of customer information or data carries privacy risks that should be properly addressed. 39 Jeff Cotrupe, contributing expert to searchtelecom.com, discusses the promise of next-generation OSS in his paper, Tackling next-gen network OSS/BSS challenges, 9/12/2008, searchtelecom.com. 40 Our analysis relies on a framework presented in IDCs executive brief, A Smarter Pipe: Managing, Monitoring, and Monetizing the Mobile Internet, John Delaney, November 2008, sponsored by Openwave.

23

TECHNOLOGY

Help the carriers' own customers: Locate web content and services Block unwanted content and malicious attacks Resolve problems encountered while using mobile Internet services Help content and service providers: Present providers content and services to end-users Provision customers quickly and efficiently Enhance the user experience Collect payment Help advertisers: Place advertising on customers devices effectively Efficiently target customers and effectively time contacts Monitor, measure and optimize advertising

24

TECHNOLOGY

InteroperabilityTower of Babel 2.0: Inter-operability Reconciles a Confusion of Protocols Interoperability allows carriers to provide revenue-generating services regardless of a customers location. Interoperability vendors facilitate communication between the diverse systems, protocols and standards emerging from telecommunications evolution. Interoperability vendors also enable carriers to provide users with comprehensive geographic roaming coverage via third- party networks. Interoperability systems provide inter-carrier routing and protocol translation and enable the execution of a number of critical activities, including: Provision of telecommunications services outside of a customers home zone Routing of SMS or MMS messages between networks Number portability Exchange of billing information between carriers Settlement of funds between carriers

Exhibit 6 presents a list of key interoperability vendors. Exhibit 6: Key Interoperability Vendors Key Interoperability Vendors Mach Sybase Telcordia

Evolving Systems Neustar Syniverse VerisignSource: Oppenheimer & Co., Gartner and IDC

Spotlight: Syniverse Technology (SVR, Outperform)Share Price 15 July 2009 Shares Outstanding Market Cap Cash Equivalents Debt 2010E Revenue 2010E Non-GAAP Operating Margin 2010E Non-GAAP EPS $16.79 67.9M $1.1B $174M $505M $500M 33.9% $1.67

Syniverse is a leading provider of mission-critical interoperability services to wireless carriers, facilitating the rapid delivery of multiple services ranging from voice calls to sophisticated data and video services. The company enables mobile roaming, mobile data services, message routing, number portability, and call completion. Key Points 85% of revenues are transaction based Leveraged to rising smart-phone volumes, and adoption of data services 95% US roaming market share and strong global market share. Relationships with over 650 in 140 countries No imminent major contract renewalsSource: Oppenheimer& Co. estimates, Reuters market data

25

TECHNOLOGY

What we have here is failure to communicate As recently as 2003, US visitors to Europe may understandably have been perplexed at the ubiquitous sight of mobile users tapping away at handset keypads. At that time texting had not taken off in the US, and the 42 use of cellular telephones for anything other than conversation was unusual. As the Economist noted : . . . but although texting has become commonplace in Europe and Asia, it has failed to take off in Morse's homeland, America . . . In some parts of Asia, such as Singapore and the Philippines, where large numbers of free messages are thrown in with monthly pricing plans, the number of messages sent per subscriber per month is as high as 200. But the figure for America is just over seven, according to the Cellular Telecommunications Internet Association, an industry body . . . . According to Jim Huseby, Director of Investor Relations at Syniverse Technology, difficulties routing messages between carriers contributed to North Americas delayed adoption of texting. We find support for Mr. Husebys argument in this somewhat long quote from The Guardian: Until recently it has been presumed that text messaging failed to take off in the US because Americans are different and preferred alternatives like instant messaging and PDAs. There is a much simpler explanation. They didn't do it because they couldn't. But now they can, and once they start, they won't find it easy to break the habit. The main obstacle to texting in the US was the lack of interconnections between the mobile phone networks. While Europe and most of Asia had standardised GSM technology (one of the most successful industrial policy decisions in recent memory), the US had multiple systems, including TDMA, CDMA, iDen, as well as GSM, and they didn't communicate with each other very well, if at all. During the past year, that has all changed. There are still dozens of minor networks that haven't changed, but most of the major ones now enable text messages to be sent between them to pay-for services like texting, ring tones, dating, voting and Java games. As a result, the US has now had the Eureka moment that Britain had at the beginning of 1998, when texting suddenly erupted after the operators opened up their networks to each other. Victor Keegan, The Guardian43

41

:

Since that time, intermediaries such as Syniverse have demolished the barriers that had retarded US 44 messaging growth, leading to a surge in North American texting volumes . According to the CTIAThe 45 Wireless Association, over 1 trillion SMS messages were sent in the United Stated during 2008, up from 81 billion in 2005. Immediate gratification drives interoperability The underlying driver for interoperability services remains customers desire to access all services, all the time. Interoperability services are required for carriers to provide a full menu of always-on services. Recently, robust adoption of data services has been a welcome development for interoperability vendors.

41 42

Captain, Cool Hand Luke, Warner Brothers/Seven Arts, 1967 No text please, were American, The Economist, 3 April 2003 43 US falls in love with texting, Victor Keegan, 20 February 2004, The Guardian, retrieved from guardian.co.uk. 44 A competing theory attributes delayed North American adoption of texting to lack of awareness of the service among North American consumers. 45 Sourced from CTIA-The Wireless Association, Wireless Quick Facts, www.ctia.org.

26

TECHNOLOGY

On a related note, in July 2009, the European Union Parliament introduced rules that dramatically cut the data rates wireless carriers are allowed to charge consumers roaming across EU member states46 (in 2007, the EU slashed intra-EU voice rates). We expect lower rates to increase demand for data services; however, carriers may be encouraged to extract pricing concessions from vendors in the service chain. New services drive the need for interoperability Introduction of diverse new services helps sustain the multiplicity of systems and protocols that must exchange information, and vendors providing interoperability services are critical to effectively managing these systems and protocols.

In July 2009, data rates were cut as much as 60%. as described in the European Parliament, press release. Lower Charges for mobile roaming from 1 July, www.europarl.europa.eu/news/ and discussed in the E.U. Parliament Caps Text Roaming Charges, New York Times, April 22, 2009.

46

27

TECHNOLOGY

Appendix 1: Billing Primer47Overview of the Billing Process In a simplified form, billing involves measuring customers service usage, gathering the usage data, applying agreed-upon per-unit charges, applying ancillary charges and/or discounts and preparing a total, which is then presented to the customer for payment. The following simplified billing process highlights key components of a billing platform. Usage Data First Created on the Network When a customer accesses the communication network, usage data is created and stored in various network components such as switches or routers. It is from this data that information about network usage (for example, information about a telephone call) is developed. Collecting and Translating Usage Data: Mediation In a postpaid system, usage data is periodically collected from network elements and aggregated. Because switches, routers and other devices on the network may come from multiple vendors using varying protocols, translating the various pieces of data to a standard format is usually a critical step in the billing process. The collection and translation of this data is known as mediation. The mediation layer or mediation device converts the usage data to a standardized record known as call detail record (CDR). [Note: With the rise of services other than voice, the term usage data record (UDR) is replacing references to CDR]. The CDR contains data regarding specific calls, including information such as origin and destination of call, time the call was made and call duration. Each call or usage event may generate multiple CDRs. Postpaid vs. Prepaid Mediation Under a postpaid billing system, data can be collected and processed at relatively flexible intervals chosen to meet network requirements or some other system need. Under a prepaid system, mediation must be executed in real-time or near real-time in order to permit real-time charging. Applying Applicable Rates: Rating After usage data is aggregated, a rating engine or rating layer applies appropriate charges per unit of use to the usage data in order to calculate the amount to be charged. Applying the applicable rates is known as rating. In some cases, usage must be re-rated in order to incorporate such variables as rate plan changes or volume discounts. Postpaid Rating vs. Prepaid Rating Similar to mediation requirements, under a postpaid billing system, rating can be accomplished at relatively flexible intervals. In fact, under a traditional postpaid billing system, the rating engine processes CDRs in batch mode at scheduled intervals. In contrast, under a prepaid system, rating must be executed in real-time or near real-time. Invoicing The invoicing engine or invoice layer aggregates the various charges that constitute a subscribers bill. These charges may include usage charges, monthly charges and taxes, for example. The invoice engine calculates totals, formats a bill for presentation to the customer, stores customer billing information, adds marketing and other information that is to be sent to the customer and presents the bill and related materials to a delivery facility. The delivery facility may be a printing service, an Internet website or some other channel for providing subscriber access to the bill. Postpaid Systems: Comparatively Flexible Billing Because postpaid customers are billed periodically, billing activities are generally not triggered by customer usage but are scheduled according to the customers billing cycle or other system requirements. These47

Excerpted from our July 20, 2008 note, Convergence: The Next Billing Frontier.

28

TECHNOLOGY

comparatively relaxed timing constraints facilitate flexible and complex subscriber agreements. For example, postpaid systems easily incorporate usage discounts, seasonal promotions or complex account hierarchies. Prepaid Systems: Tighter Processing Constraints Prepaid billing, on the other hand, imposes significant timing constraints. A prepaid system must operate in real-time (or near real-time) to verify account standing and account balances, to decrease a users account balance based on the usage units and applicable rates, and to increase a users balance based on funds added. The prepaid system must accomplish these tasks in real time in order to prevent inappropriate service denial, fraud and/or revenue leakage. In general, real-time processing capability entails a trade-off, and prepaid billing systems, while capable of handling tighter processing constraints, are significantly less flexible than postpaid systems. Thus, while postpaid systems easily handle the implementation of billing discounts, promotions and complex account hierarchies, under prepaid systems, such implementation is difficult or impossible. Prepaid Capability: Critical to Convergence Since prepaid billing is a component of a converged system, a converged billing system must meet the realtime processing requirements of a prepaid system. In terms of system components, real-time rating and mediation are critical components of a converged system.

29

TECHNOLOGY

Appendix 2: OSS Functional Framework48OSS Functional Areas OSS comprises solutions that address the service and resource management functions in the carrier's back office. We define these as follows: Service Management Service Planning, Creation and Retirement includes software, systems and equipment that manage designs and test the creation and delivery of new services, from the lab to end-user retirement. Service Configuration and Activation deals with the initializing, loading, modifying and tracking of the configuration parameters of required network hardware and software, as well as providing the actual requested service to end-users, including all agreed configuration, quality of service (QOS), features and pricing. Service Inventory Management tracks and manages all service objects, software and assets of installed and "on-hand" services for efficient inventory, procurement, availability and reuse. Service Monitoring encompasses the use of equipment and software that can capture, record and analyze details of the service, equipment and traffic patterns. Normally used in conjunction with problem management. Service Problem Management includes the ability to track and capture problems in the network that are reproducible, and that are identified as defects or anomalies. Service Performance Management tools that support the monitoring and performance issues in developing real-time or near-real-time information for trends and reporting. Service-Level Agreement (SLA) Management tools that support the monitoring of SLA agreements and report violations in the QOS provided to end-users.

Resource Management Network Planning and Engineering includes the steps from network planning to construction (for example, budgeting, procurement, and line and service testing). Network Performance Analysis and Reporting a measuring, analysis, trending and support suite of tools to improve performance of the network, sub-networks and network elements. Deals more with performance than hard faults. Network Capacity Management tools to plan, predict and ensure that network equipment, elements, products and services will be available regardless of peaks, spikes and the planned growth of subscribers and new services. Network Provisioning and Activation includes systems and steps related to the process of implementing orders for customers. Network Configuration Management deals with installing, initializing, loading, modifying and tracking the parameters of network hardware and software. Network Inventory Management tracks and manages network assets. In this ongoing process, installed and "on-hand" network assets are tracked for efficient inventory, procurement, repair and reuse.

48

Gartner model. Gartner Document ID number G00164863. 12 February 2009.

30

TECHNOLOGY

Network Monitoring tools to support the monitoring and performance issues in developing realtime or near-real-time information for trends and reporting. Network Problem Management addresses the identification, isolation and correction of network problems and faults. Also initiates strong error and alarm characteristics. Workforce Management encompasses activities surrounding work assignment, coordination and tracking. The process involves ensuring that personnel with the appropriate qualifications are given the correct equipment at the right time and place. Examples of IT applications and systems supporting workforce management are dispatch, workflow management and project tracking.

31

TECHNOLOGY

Appendix 3: BSS Functional Framework 49BSS Functional Areas Closely linked to OSS, BSS are the systems processes closest to and often interacting with end customers, including, for example, product management, order management, customer management, and revenue management systems. One model of BSS broken down across functional lines defines BSS as covering marketing/sales management, product management, service and resource management, partner/supplier management and enterprise management. Marketing/Sales Management Campaign Management includes the capability to provide marketing analytics and target campaign management and optimization. May include prebuilt campaign templates for customer acquisition, development, re-activation, churn management and so on. Channel Sales Management includes software to manage distributors, dealers, rental organizations and other direct channels.

Product Management Product/Service Catalog Management undertakes functions such as listing products and services, assembling a commercial product hierarchy, and managing business rules relating to offers, upgrades and options. Product Life Cycle Management includes software and systems that manage, design and test the creation and delivery of new products, from the lab to live deployments. Product Performance Management includes software to monitor and report the performance of a product against set criteria.

Customer Management Customer Self-Care Management enables customers to undertake functions like account management, e-shopping and order management, online problem resolution, electronic bill presentment and analysis, and service activation and configuration, without intervention from enterprise employees. Customer Contact, Retention and Loyalty allows an enterprise to track contact with customers and receive a complete history of previous interactions and relevant information, in a bid to increase customer loyalty and aid retention. Order Management captures, authenticates and enables customer orders. Functions may include pre-order feasibility, determining credit authorization, order issuance, order status and tracking, and customer order updates. Customer QOS/SLA Management includes a set of functions that track QOS and performance against SLAs, as well as the management of QOS/SLA violations and the reporting procedures to customers, among other things. Customer Service/Account Problem Resolution acts as the bridge between resource problems (such as network faults) and customer-affecting issues. Customer Billing Management includes the ability to produce timely and accurate invoices, and manage changes to billing accounts and customers' service portfolios. Extra functions may include consolidated bills (fixed and mobile, for example), Multilanguage bills, hierarchy-based bills for corporate use, and identification of targets for marketing or up-selling and cross-selling.

49

Gartner Model. Dataquest Insight: Carriers and Vendors Must Prepare for Further Consolidation in the BSS Market. Document ID G00164864. 12 February 2009.

32

TECHNOLOGY

Collection and Receivables Management includes functions to handle payments and receivables. Additional functions may include dunning and back-office and call-center support. Invoicing includes functionality to produce bills that include products, quantities and agreed prices for products or services. Bill Design and Formatting software tools that allow users to customize the look and format of a bill, maintain various bill templates and include support for multiple languages.

Service Management Service Rating/Discount Management applies the customer-specific rates and discounts to be applied to basic call detail records, to arrive at the final billable amount to be added to the customer's invoice. Resource Management Real-Time Charging This is significantly different from conventional post-paid mediation systems, since pre-paid systems take usage information direct from the signaling networks, and they monitor in-call usage. To do this, they must acquire and validate events, format events into a commonly formatted event record, identify routing and the relevant rating, and communicate with session control devices. Mediation traditionally provides network to OSS data collection, aggregation, correlation and distribution to downstream systems. The solution may also include an active mediation element that facilitates the interaction, activation and delivery of IP-based services.

Partner/Supplier Management Partner Relationship Management offers a set of functions to manage agreements for services provided by partners. Functions may include revenue settlement, discounting, partner Web self-care and so on. Interconnect Billing includes support for inter-carrier settlement, including rating, revenuesharing and multi-party settlement capability for multiple services.

Enterprise Management Revenue Assurance Management enables an enterprise to identify and prevent revenue leakage across a range of service provider operations and systems. Fraud Management includes functions that help in the detection, management and investigation of fraudulent events in the operators' networks.

33

TECHNOLOGY

Appendix 4: NC Computing What Is Different This Time?50There are many different names for network-centric (NC) computing, including the Internet itself, grid computing, cloud computing, software-as-a-service (SaaS), virtual servers and Web 2.0. Regardless of the name used, it is basically networking and sharing computer processing, storage and data, which can be accessed over the Internet using thin devices at the edge of the network. This increases demand for communications connectivity, computer utilization and efficiencies. It also drives the convergence between communications, computing, media and CPE devices, greatly expanding the size of the market. We believe that the added utility from receiving computing/communication capabilities wirelessly on a thin device is the killer application. We believe that in NC computing virtually all devices with a microprocessor will be able to communicate with each other, with most of the interaction being done wirelessly, machine to machine. This process will increase the number of devices connected on a network from the hundreds of millions to the billions. Based on Robert Metcalfes law of network value, when any number, N, of machines is connected to a network, the value created is N-squared. We expect significant value creation from NC computing. The migration to NC computing is a secular shift, once every two to three decades or so. The last computing shift occurred in the mid-1980s (PC), and the one prior to that in the 1960s (mainframe). The migration to network-centric computing should continue to generate strong industry volume growth, but the process also creates a number of long-term uncertainties. Using a historical example, in the early 1980s, when the computer industry was moving from mainframes to PCs, there was frenetic growth, but it was difficult for investors to separate the individual winners from the losers. Then, as now, there was an initial explosive boom-bust period, with the original VisiCalc spreadsheet applications driving an enormous industry investment cycle from 1979 to 1982, with consumers frantically buying Commodores, Apples and other computers. A shakeout period of a few years followed. The next boom cycle started in 1984 with the industrys move toward more graphics-intensive services, such as the Apple Macintosh. Despite the resumption of strong growth, it took several more years (the late 1980s) to sort out the long-term winners from the losers. Exhibit 7: History of NC ComputingCommunications Intensity

1920s Mechanical

1940s Analog

1960s Mainframe

1980s PC

2010s NetworkCentric

Source: Oppenheimer & Co.

In 1999-2000, NC computing had a much larger impact on the overall economy (as it will going forward, in our view) than the PC industry had, so there were dozens of companies that were recognized as driving the bubble. Consequently, we had a much larger shakeout. From a customers perspective, AOL, Amazon and Yahoo! were some of the main driving forces of the initial NC computing boom, showing the promise of

50

Source: "The Genie Is Out of the BottleApplications Separating from the Network," June 11, 2009, Oppenheimer & Co.

34

TECHNOLOGY

future services. This rebound in interest in NC computing was mostly driven by Google and social networking sites such as MySpace. From a pure computing perspective, NC computing will combine the strengths of PC computing (analytical) with mainframe (transactional processing). Computer scientists divide computer processing into two broad functional groups. PCs are great multifunctional tools for analytical computing, which is usually not real, but involves a thought processe.g., building spreadsheets, writing a report, etc. Mainframes (which are still at the heart of most order entry or reservation systems) are optimized for transactional processing, usually in real-time: the sort of call and response data exchange that happens when a travel agent checks a reservation, a supply clerk updates an inventory database, a call center worker enters an order, or a customer browsing the Internet makes an on-line purchase. Network-centric computing can support both transactional and analytical processing (by emulating a PC or a mainframe within the network), at a much lower cost. Some of the cost savings come from utilizing a thin client, which is relatively inexpensive and easy to maintain (also much lighter to transport). We have seen many devices with computing capabilities, but the number of these that are networked was limited to mostly PCs and now smartphones. A thin client could just as easily be a Coke machine, kiosk, cash register, parking meter, etc. Mainframes limited users choices to a few models of rigidly defined dumb terminals. In NC computing, we expect the majority of access devices to be thin and wirelessly connected. Collectively, these thin clients will offer far more flexibility, power, and efficiency than any PC, as long as they have access to the computer capabilities embedded in the network. In this regard, we argue that broadband wireless data is critical to enabling this growth. The entire value of a wireless device is based on its connection to a network. As we see it, every advance made by the wireless data revolution is a step forward for the network-centric revolution as well.

NC Computing Happening NowThe saturation of broadband combined with mobile broadband is why NC computing is starting to take off. In our view, the current transition in the communications industry most closely parallels the changes experienced in the computing industryspecifically, the migration from mainframe to personal computing. The mainframe-to-PC transition divided the industry to wholesale and retail, which is also known as horizontal segmentation. Importantly, this transition resulted in new innovations and grew the overall size of the industry. We have been seeing, and expect to continue to see, a similar trend in NC computing. The Internet, e-mail, IM, search, peer-to-peer, music downloads, and wireless applications have not been created or dominated by incumbent service providers. Exhibit 8: NC Computing Frees Applications from Networks

Present:Applications tied to specific networks (i.e. video only over cable or airwaves, voice only over PSTN).

Network-centric Computing:Applications separate from networks, all running over IP.

Broadband is an incremental service on top of core voice or video service.

Broadband is the core service, video and voice are incremental services.

Source: Oppenheimer & Co.

We believe that ultimately incumbent telephone operators around the world will realize the benefits of this structure and voluntarily break their companies into two. One company will contain most of the local

35

TECHNOLOGY

infrastructure that will be sold in a truly neutral manner to dozens of different application/customer-facing companies, the main one being its former partner. Exhibit 9: Expect Industry to Reorganize Along Horizontal LinesCustomer Customer Customer

Content

Media Provider

e-Commerce

Community Site

VPNs

Corporate Data Center

Storage & Processing

Enhanced Data Services- Prioritization - Caching - L.D. Transport - Local Wire-line/less Connectivity

Data Centers

ASP

"Network of Networks" Transport Aggregator

Wholesale Networks

Core Network TransportVertical Market Application Bundler/Provider

Application Service ProvidersLaw FirmCustomer

In-Building NetworkCustomer

ConsumerCustomer

Parts Supplier

CustomersSource: Oppenheimer & Co.

We believe the availability of broadband wireless speeds (due to both new technologies and increased spectrum holdings by the carriers), broadband penetration of 90% (indicating that Internet usage and application development have become commonplace), increasing popularity of smartphones (as scale and Moores law drive device efficiency) and substantial subsidies by carriers, and explosive growth of wireless applications (that provide productivity and entertainment) have all fallen in place for NC computing to thrive.

36

TECHNOLOGY

Appendix 5: Select Company Snapshots51 (Alphabetical)Accenture Accenture is a leading telecom operations management systems integrator and is one of the top providers of OSS, BSS and next-generation service delivery platform NG SDP solutions. Accenture benefits from its strong consulting and services framework that focuses more on "telco 2.0" activities than traditional telco services. The company's "new product development and innovation" strategic initiative focuses on helping service providers grow through better customer experience and bringing innovative products to market faster and at lower cost and risk. Forming and maintaining partner ecosystems comprising independent software vendors ISVs, network equipment providers NEPs and regional providers is core to Accenture's strategy in this domain. The company has invested to build distributed delivery capabilities in emerging and low-cost markets to reduce associated costs and compete against other emerging providers. However, the company, as compared to peers like IBM, has yet to establish itself in emerging and high-growth markets, especially with respect to managed and outsourcing engagements for telecom operations management systems services. Alcatel-Lucent Communications equipment maker Alcatel-Lucent (ALU) provides a variety of telecom back-office software solutions and professional services, primarily in the operations support system (OSS) space, with additional focus on Tier 2 and Tier 3 in the business support system (BSS) space. The merger of the two companies has left the organization with two parallel charging solutions, both of which have been deployed in dozens of carriers. Traditionally, ALU deployed its charging solutions in conjunction with hardware sales, but it now aims to penetrate the carrier market by offering a stand-alone software-based convergent charging solution. Alcatel Lucent was formed when Alcatel and Lucent Technologies merged on 30 November 2006. It is emerging as a unified vendor for telecommunications equipment and services with a comprehensive telecom operations management systems portfolio, including OSS. The combined company continues to demonstrate worldwide reach, with core markets in Western Europe and North America, and recently good traction in emerging markets. ALU has a broad OSS pre-integrated solution portfolio spanning wireline, wireless, cable and IP segments. However, a number of best-of-breed products are embedded in the portfolio on an OEM basis with leading ISVs and Sis, predominantly Amdocs and Comptel in fulfillment, and IBM in service assurance. Amdocs Amdocs was the first suite vendor in the industry to introduce an end-to-end solution spanning OSS, billing and CRM suites. Its comprehensive suite reaches across service fulfillment, network and service management, workforce management and inventory management, as well as planning and engineering tools. Amdocs particularly accommodates the needs of large carriers that want to deal with a limited number of strategic suppliers. The $3 billion vendor is the preferred, best-in-class billing vendor for many leading carriers around the world. The acquisition of Cramer in 2006 has been an important strategic move to fill its solutions gap in the fulfillment/inventory space. Furthermore, Amdocs intends to reproduce its success as a billing vendor within the OSS space. Since the acquisition, Amdocs has done a good job leveraging the Cramer assets as a leader in next-generation inventory systems. The fact that most carriers around the globe still source best-of-breed integrated solutions, instead of solution silos, has worked against the end-to-end approach. However, Amdocs' modular approach means that the carrier can choose to grow into a larger solution one phase at a time.

51

Source: Oppenheimer & Co., Gartner, and IDC

37

TECHNOLOGY

Its success in the BSS and OSS markets is closely linked to carriers' vital need for transformation and modernization of existing legacy infrastructures. This requires a great deal of system integration, business consulting and customization expertise. Amdocs derives around 95% of its revenue (including the directory publishing line of business [LOB]) from services. It is involved in many of the major carrier transformation programs worldwide. Amdocs CES 7.5 is a genuine OSS, BSS and CRM software suite with a dedicated road map, which centers on improving the quality of customer experience. During the past six years, Amdocs has invested more than $900 million in developing its software. In addition to its software product, Amdocs offers comprehensive integration services, managed services and business process outsourcing (BPO). The company is dedicated to expanding into business consulting expertise and addresses carrier transformation requirements with programs tailored to the type of carrier. In this context, Amdocs' strategic partnership with IBM, which is based on IBM's strong process-driven implementation framework, should begin to prosper. The acquisition of Jacobs Rimell raised the company's profile in the service fulfillment and subscriber management area, and helped it enter the cable business market. Recent R&D efforts focus on an extension of planning and engineering capabilities, which allow more proactive inventory and network capacity management, as well as service assurance and customer experience management solutions. Moreover, development efforts center on out-of-the box, prepackaged operational product packs (OPPs) that speed up the time to deployment for a process to support a specific service or technology, such as broadband fulfillment. Cerillion UK-based Cerillion was spun off from LogicaCMG in 1999. Its product portfolio covers billing and rating, customer life cycle management, service life cycle management, provisioning, mediation, interconnect billing, self-care, document management and information management. The company recently introduced Cerillion Express for Mobile, an integrated billing and CRM suite that, it claims, can get a mobile operator up and running in 10 weeks. More than half of Cerillion's 30-plus installations are in Western and Eastern Europe, but the firm also has a solid presence in the Americas and the Middle East and Africa. Annual revenue is approximately $20 million, and the company's strategy is to grow organically, rather than through acquisitions. CGI Canadian services firm CGI inherited its BSS solutions suite, Tapestry, through its acquisition of American Management Systems (AMS) in 2004. Tapestry includes a full set of BSS modules, such as customer care, rating, billing and order management. CGI also offers various related solutions, such as interconnect billing (InterSettler), collections (CACS), decision management (Strata), customer delinquency self-cure (Web Promises) and enterprise incentive management (eINcent). CGI generates around $90 million of revenue from BSS, which makes it one of the larger players in the field. The company has about 30 BSS clients, mainly in