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OSS

Telcordia Lands RBOC Extensions

OSS giant Telcordia Technologies Inc. has landed extended maintenance service deals with Qwest Communications International Inc. (NYSE: Q) and Verizon Communications Inc. (NYSE: VZ) and is set for a significant internal reorganization, according to industry sources.

Telcordia confirmed the deals late Wednesday, but declined to reveal how much they're worth.

The news comes as Telcordia's owners, private equity firms Providence Equity Partners and Warburg Pincus , are believed to be seeking a buyer for the telecom software firm, having acquired it less than two years ago for $1.35 billion. (See Is Telcordia Preparing for a Sale? and Telcordia Up for Grabs Again?)

News that Telcordia has the "For Sale" sign erected at its headquarters has sent the price of Telcordia's bonds up dramatically in recent weeks, according to financial sources. And should such a sale take place, it would be just one of many in an OSS acquisition wave that is creating an elite group of OSS supervendors. (See M&A Reshapes OSS Sector and 2006 Top Ten: Big OSS Highlights.)

Telcordia declined to comment on any matters related to merger and acquisition speculation.

News of the extended RBOC contracts, which would guarantee certain revenues for the next few years, will help any prospective sale. Telcordia is believed to have extended "life cycle program" maintenance contracts with Verizon -- a new three-year deal running to December 2009 -- and Qwest, which has signed a new four-year extension that runs to December 2010.

Such deals are the lifeblood of Telcordia's cashflow, especially as these deals dictate that the RBOCs pay in advance, on a semi-annual or annual basis. And now that AT&T Inc. (NYSE: T) and BellSouth Corp. (NYSE: BLS) are tying the knot, another major long-term maintenance deal could be in the pipeline. (See FCC Welcomes 'Ma Bell' Back.)

Such contract extensions are vital to the company's survival, and likely, its sale. According to sources, the company is on course to report (privately) revenues of $730 million to $740 million and earnings before interest, tax, depreciation and amortization (EBITDA) of $160 million to $165 million for the financial year to January 31, 2007. That's down from revenues of $790 million and EBITDA of $185 million for the previous year.

The decline in revenues is even more stark when figures from just a few years ago are considered. In its fiscal year to January 31, 2002, Telcordia generated revenues of $1.4 billion. In the year ended January 31, 2004, its revenues were $887 million.

Telcordia declined to confirm the revenue and earnings forecasts.

In addition, Telcordia has about $970 million of debt that was affected by a recent downgrade (two notches, from B1 to B3) from Moody's Investors Service , which added a "negative outlook" to boot. Moody's noted the downgrade "was prompted by the company's declining revenue and EBITDA forecasts as well as its substantial reduction in liquidity during the first half of the fiscal year."

Moody's added: "The negative outlook reflects Moody's concerns regarding liquidity and product mix. Moody's expects cash balances at fiscal year end January 31, 2007, which will be used to fund fiscal 2008 operations, to be materially below the level of the same period last year. Additionally, declines in spending by telecom carriers on Telcordia's legacy OSS products are likely to continue to outpace the rate of adoption of Telcordia's next generation OSS and IMS product lines."

Ouch!

Accentuate the verticals
Telcordia is also planning an organizational revamp based around vertical business sectors, according to our sources, with each business unit having its own dedicated sales, product management, software development, marketing, and services personnel.

The units are: Service Delivery Solutions; Advanced Technology Solutions; Global Solutions; Interconnection Services and Consulting; and Core Solutions.

What we don't know, though, is how these new units will relate to Telcordia's carrier customers, or whether this is a reorganization that will make a breakup and sale of the company easier for its owners.

Telcordia said only that it "has always had an internal business unit structure. From time to time there are modifications to align with changes in the industry."

It seems likely, though, that Service Delivery Solutions would relate to business associated with the vendor's Converged Application Server, its Service Delivery Platform (SDP) offering. (See Telcordia, Oi Develop Services.)

Despite its shrinking revenues, Telcordia is still far and away one of the biggest players in the telecom software world, with products and services in nine of the 15 categories in our new report, Who Makes What: OSS , as well as product offerings in the hot markets of IP Multimedia Subsystem (IMS) and SDP. This makes its potential sale, and future, of great interest to many in the industry. (See HP, Telcordia Hop SDP Bandwagon, OSS Firms Jump on IMS, and IMS, SDP Revolutionize OSS.)

— Ray Le Maistre, International News Editor, Light Reading

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