As a keen OSS-BSS observer, I like to parse financial disclosures to gauge the health of the market. Given that CSPs do not disclose their spending on OSS/BSS, it is difficult to do a top-down analysis of the industry. So, a bottom-up study based on the disclosures of publicly listed vendors is my* best alternative. Even here we run into difficulties as big beasts such as Salesforce, Oracle, HPE, IBM and ServiceNow do not disclose how much of their revenue comes from the telecom sector. But we get enough nuggets from those companies that do disclose to make the exercise worthwhile. Below we recap financial performance in 2018, what the outlook is for 2019 and what the report cards look like at the half year stage. We also summarize recent sector M&A to get a sense of what's hot from an investment banker's perspective.

Revenues flattish in 2018
We were able to collect verifiable revenue data (i.e., from financial disclosures) for 2017 and 2018 for 17 OSS/BSS vendors. Their median revenue growth in 2018 was 0% and the mean was 2%. Notable "growers" include Comarch, whose telecom revenue grew 19% "thanks to the implementation of new projects in Asia and Western Europe," and Enghouse, whose 14% revenue growth in its Asset Management division was attributed to acquisitions. Notable shrinkers include Optiva (-15%), which has retrenched from unprofitable contracts, and Symsoft, whose parent company (Sinch) did not explain its 12% revenue decline.

Although Ericsson's performance was close to the median in 2018 it is worth mentioning given its relatively large size. Ericsson's Digital Services sales fell 4% on a like for like basis in 2018. Sales in BSS declined by 11% while sales in OSS and Cloud Core grew an unspecified amount YoY, driven by demand for the 5G-ready portfolio. We estimate that BSS and OSS are each around 20% of Digital Services revenue. Note Nokia changed its reporting structure twice through the course of 2018 and has not given a prior year comparison figure for its 2018 revenue from the Software division. Nokia Software is about 75% bigger than the previously reported Applications and Analytics division and hence contains a lot more non-B/OSS stuff than the previous perimeter.

Margins down in 2018
We were only able to get profitability measures for 13 of the companies in our universe. The mean EBITDA margin declined from 15% in 2017 to 13% in 2018. The median declined from 20% to 16%. Enghouse Networks had the highest EBITDA margins of the group in 2018 (36%), while Ericsson Digital Services (-13%) and Radcom (-13%) had the lowest.

Most companies delivered broadly consistent EBITDA margins across 2017 and 2018. However, Radcom went from a single digit profit margin to a double-digit negative margin as revenue fell short of expectations. Ericsson Digital Services continued to lose money in 2018, albeit at a reduced rate. The division saw a significant improvement in adjusted gross margin to 32% from 15% the year earlier. However, it remained lossmaking at the operating profit level. Ericsson says its top priority for Digital Services is to reach low single-digit operating margins (excluding restructuring charges) by 2020. Key to the turnaround of Digital Services is to complete, renegotiate or exit 45 non-strategic contracts. Nokia changed its reporting structure in 2018. It did not previously give profitability measures for its Applications and Analytics division. The new division, Software, had an impressive EBITDA margin of 19% in 2018.

Optiva saw a 34-point improvement in EBITDA margin, thanks to past restructuring, but re-mained loss making in 2018 (-6%).

2019 outlook
Of the public companies that do provide financial disclosure on their OSS/BSS business, very few provide any quantifiable outlook. Amdocs is looking for around 4% revenue growth (constant currency) in its fiscal year ending September 2019, but it is unclear how much of this is due to acquisition. Similarly, CSG International expects revenue growth of around 6% in 2019 though how much is due to the acquisitions of Forte and Business Ink is not stated.

Radcom's guidance suggests a revenue decline of 12% this year. The company is highly dependent on AT&T for revenue and the deployment of its NFV solution appears to have been delayed. U.K.-listed Cerillion and Spirent both hope to grow an unspecified amount this year. NetScout expects its revenue to grow in low single digit percentage terms in its fiscal year ending March 2020.

Half-time progress
At the half year stage, we have had results thus far from Amdocs, CSG, Ericsson, Nokia, Optiva, Spirent, and Symsoft.

M&A
The OSS/BSS sector continues to see consolidation as CSPs increasingly look to pre-integrated suites rather than best-of-breed point solutions.

My 2 cents
At the half year stage, the major OSS/BSS vendors that have reported indicate that revenues are growing in the low single digits for the industry overall (mean and median growth of 4% based on Amdocs +4%, CSG +10%, Ericsson -2%, Nokia +2%, and Spirent +6%). Beyond 2019, growth in the market will depend on CSP appetite to invest in digital transformation and leverage new business opportunities enabled by 5G; new entrants, such as mobile virtual network operators (MVNOs), looking to launch telecom services on third-party infrastructure; and the financial health of the traditional service provider industry.

The OSS/BSS market is likely to undergo significant change in the coming years, driven by use of public cloud for OSS/BSS, the move to network virtualization and, more broadly, by the transformation of communications service providers into digital service providers. Whether these forces lead to a consolidation around a handful of full-suite providers or a proliferation of best-of-breed vendors remains to be seen. However, modernization of OSS/BSS will be key to the automation of network and customer operations, as well as the increase in openness and agility that CSPs need in order to compete as we approach the 2020s.

*Note: My colleagues at Ovum carry out an annual survey of CSP spending intentions which provides additional insight into demand for OSS/BSS solutions here.

— James Crawshaw, Senior Analyst, Heavy Reading