ECtel: Figures and Future

Last week, Israeli revenue management vendor ECtel announced their Q2 results. I spoke to Benny Yehezkel, Executive Vice President of ECtel, about the recent figures and his expectations for the future of his business.

Eric: Revenues are up, margins are up. How satisfied are you with the most recent results? You have seen improvements in Q1 and Q2. Is everything on plan in terms of management hopes?

Benny: Yes, everything is on plan. We are very proud that things are going better. We look to improve even more in the future.

Eric: You mentioned, in discussing the margins on the call, that margins were depressed because of some very big deals involving third party hardware. Do you expect that you will be doing more deals that involve third party hardware in the future, or were your sales relatively unusual for Q2 and Q1?

Benny: It can always happen. We cannot really foresee if we are going to involve hardware in our deals. Most of the time it comes from the customer’s request. Obviously, margins on hardware are much less than for services and much less than for software. We are not building our plans on the assumption that we are going to have a high percentage of hardware within our deals, but it could always happen. We control our services, we control our software, we control the margin on the planning of the implementation of the project. We cannot really control the margin on hardware. By the way, besides the hardware, you need to understand that the dollar rate also influences our gross margin.

Eric: If the customer wants it, you’ll provide it. It’s not ideal for you to be selling hardware but, at the same time, you are making some margin so obviously you’ll provide hardware where customers ask for hardware. In the end it’s good business although it’s lower margin business, so you can’t afford to turn that business away. To some extent your margin will fluctuate depending on whether customers ask for hardware or not.

Benny: Exactly. Margin-wise, we would not like to provide it, but I believe in customer relationships. If the customer tells us ‘we need this as a turnkey project and we need you to provide the hardware‘ then I have no choice. I want to be very flexible to the customer. Although I am not really keen on selling hardware, sometimes I do not really have a choice.

Eric: On your results call, it was mentioned that there is still some hope that you will break even this year, but that is very dependent on the exchange rate with the US dollar. Looking at the order pipeline that you’ve got now and the exchange rate at the moment, if the exchange rate stayed the same, would you be confident of breaking even by the end of this year?

Benny: I don’t want to make any declaration other than the declarations made on the call. As we said, our results were affected by the contribution of two lower-margin, yet strategically important projects with major telecom groups and potential for higher-margin follow-on business. Also the Company’s results were negatively impacted by the continued weakening of the US dollar against the Israeli shekel, which during the quarter devalued 5.7% against the Shekel. This directly contributed to an approximate $300,000 decline in the net income for the period. We are doing everything possible to reach the break even point

Eric: 41% of your sales went to Eastern Europe in the quarter. Are you thinking of perhaps spreading your risk by increasingly invoicing in different currencies, rather than the dollar?

Benny: We are not trying to build a business based on currency issues. When you say 41% of sales, it’s not 41% of bookings, you mean 41% of revenues. It relates to delivery of projects within the same quarter, it does not suggest how business is distributed. We are building our business to accommodate all opportunities we can handle in every part of the world. If I can increase the share of North American from X percent to 3 times X percent, I will do that, even though I’m more exposed to the dollar. I’m trying to build a healthy business based on the fact that I am going to have profitable deals that are going to give benefit and value to the customer and that are going to be smart for me. I’m not taking dollar rates as a factor when I’m trying to compete on deals or we are building the strategic plan on where to focus and what to do. Of course, on the bottom line there is some impact, but building a healthy business doesn’t take into account short term dollar exchange rate issues. I am sure in the long term it will have no impact, and if I have an increased footprint in US dollar based deals, that will help me a lot.

Eric: Can I ask a couple of questions about some of the deals you have made recently. You’ve got the deal now with Amdocs, where they’re going to become a channel to sell particularly your fraud prevention software and equipment. Are you starting to see some orders come through the Amdocs pipeline already?

Benny: We started to build a pipeline and I am very pleased that the pipeline is growing and to see its progress. Unfortunately, it is not time to announce a joint deal yet. I hope it will be in the near future. It is not only for fraud but also for revenue assurance and other products we have in the portfolio. I think we need to give it a little bit more time. We know that the sales cycle for such a deal is not three months – it takes a little bit more to actually finalize a deal. Personally, I am satisfied with the pace of development of the relationship with Amdocs and the pipeline that we are working with.

Eric: You acquired Compwise’s products earlier this year. Are you expecting mostly to cross-sell your existing products to Compwise customers, or are you looking at Compwise as an opportunity to offer diversified products to existing ECtel customers, or do you expect this will open up new markets? What do you see as being the likeliest source of benefits from the Compwise deal?

Benny: Everything you’ve said, plus.

Eric: [lol] Good answer.

Benny: Let’s start from the beginning. We decided to buy Compwise not only because of the fact that we want to cross-sell our products to Compwise customers and vice versa. It started from the concept and the portfolio that we are trying to build. We see ourselves as the leading provider of integrated revenue management. We don’t believe that operators today need to focus only on fraud issues, or only on revenue assurance issues… we do believe that there should be a very high rate of interoperability between all those systems. When we came up with this strategy, we decided we needed certain applications to be added to our portfolio. One of them was Compwise’s product. We are going to rebrand the Compwise products – probably we will announce that soon. We took two products that Compwise had, and rebranded them into two of our models within the IRM portfolio. One of them is BillView, which is actually the product that handles the billing verification or the audit of the invoices provided by the operator. The second one is the start of capabilities to provide strategic planning on rating plans to the operators. It is mainly used by strategic departments, rating planners etc. We took that and we’re going to integrate it into our Business Intelligence model which we call BusinessView in order to give additional capabilities for ‘what-if’ scenarios: what will be the impact if I am going to raise my rate plan by five percent? Probably I will lose some customers, but I will make more money on the customers that will stay. What will be the impact if I do the opposite operation, and reduce the price? I will get more customers and make less on each of them. We decided to purchase the assets of Compwise – we didn’t buy the company, we bought the assets, the systems, the customers etc – in order to complete the portfolio of revenue management. Naturally we wanted the ability to be able to cross-sell to Compwise customers. We get very prestigious customers with the Compwise deal: France Telecom, Orange UK… customers in Australia, Spain, Thailand, South Africa. And of course we want to sell Compwise products to our customers. But the deal mostly came from our understanding that we need to expand the portfolio, that customers will not see the highest value by only implementing a revenue assurance system or only implementing a fraud system or only implementing a business intelligence system. They will see the highest value, both from an IT and a functional perspective, if they address all the problems they have now and might have in future when tackling revenue management issues.

Eric: You talked a little bit about being the integrated revenue management company. It is a very competitive market. What would you say is ECtel’s USP in comparison to its competitors, and how would you distinguish the importance of that USP in driving future sales?

Benny: We touched on that a little bit in my last answer. First of all, it is about the need of the market. It resembles in a little way the collision of concepts between Airbus and Boeing. Boeing said ‘we want to do point-to-point planes, we believe that people will fly point-to-point and not through hubs‘. Airbus said ‘we believe that most people will fly hub-to-hub and then they will spread to a smaller network‘. That is why Airbus came up with a bigger plane that can accommodate more passengers. We believe, like Airbus, that management should provide an extensive portfolio. We believe our products are very highly competitive in all aspects, but we don’t believe in best of breed. We don’t believe companies should be highly focused on, let’s say fraud, but not other aspects of the portfolio. We don’t believe companies should excel only in revenue assurance and cannot address problems of customers in terms of network issues, business intelligence, and billing verification etc. That is why we believe are unique selling point is our ability, not only to address the whole range of issues that cause headaches in terms of revenue management, but also to build an infrastructure that is so flexible that we will be able to add more and more applications, according to the market trends, according to the operator needs, and according to problems that nobody even knows of today but will emerge in the next couple of years. That’s why we came up with the IRM concept. We are accompanying the IRM concept not only by products, but also by what we call IRMA, the IRM Alliance.

Eric: IRMA?

Benny: It is a sort of a social network, a Facebook for revenue management users. We are going to allow everybody to share information, to share knowledge. For our customers, they will also be able to get deeper controls and KPIs and plug-ins, but for the open community, they will be able to meet other people that are tackling the same problems, understand what they are doing, understand their challenges, and reduce the learning curve. In terms of the unique selling point we believe that, first of all, we need to provide a single point of contact in order to tackle all revenue management issues – by the way, not only leakage issues but also monitoring and control issues. I want to allow business people to be sure they are on top of their processes. I don’t want the CFO to wait until he gets a report from Marketing telling him that ‘on this service we did not do as expected‘. I want him to see if the pace of acquiring new customers for new services is as planned, and if less, I want him to know immediately so he can ask why and what can be done to meet the plans. The second aspect is that I want to provide my customers with a tool that will reduce the total cost of ownership. Let me give you a quick example. If you buy revenue assurance and fraud systems from two different vendors, you have two projects. You will have to load the CDRs into the revenue assurance system, you will have to load the CDRs into the fraud system. You will have two storage systems, two projects, two implementations, you will have two different systems to maintain. With our concept of IRM, let’s assume you’ve installed the fraud system. You already have all the CDRs in your storage. Now you would like to have another module from our portfolio. It could be the revenue assurance, it could be the billing verification… it doesn’t really matter in what order. You don’t need to load the CDR’s again. They’re already there in your storage. When I’m going to plug in the next module, I’m going to use that. You get the benefits of both worlds. It is loosely coupled, so you don’t need to have everything at the same time. You can start with one module, but as you grow, you reduce the time to implement new systems. This reduces delivery time, return on investment time, but also reduces the total cost of ownership.

Eric: I agree with you entirely about the cost and processing efficiencies of trying to achieve multiple goals from the same data, but I can also see a counter-argument that says if a company isn’t organized so the same people are working in similar fields, say that revenue assurance and fraud aren’t managed by the same people, that may be an obstacle to implementing one system across an organization. Do you find that it’s easier to sell to companies where they do have revenue assurance, fraud, maybe business intelligence as well, being run in the same area, than it is to sell to businesses where these teams are fragmented and in different parts of the business?

Benny: Not necessarily. It’s always easier to sell to a single point of contact. If I have a relationship with a specific department, it is always easier to sell the next product to the same guy. But it’s not for the reasons you mentioned. Let’s say it’s a fragmented operator, so I am selling to the department that handles revenue assurance, they are going to IT to handle the storage, the loading of the data and all the CDRs are located in the database. Now let’s assume I have to sell the fraud system to another department because in this operator it is a different department. They would still go to IT, and IT will tell them: ‘great, we already have those CDRs‘. The department will only see the implementation of the specific controls, alerts and alarms on the dashboard that we will now provide. But everything that is under the hood is still there. This is under IT responsibility. It is not that the new department will say we have to do it all again because it is not the same department. On the contrary, I will come to the next department and say ‘because you already have the CDRs, the time to implement the system will be a lot shorter, and you will see return on investment a lot faster‘.

Eric: Okay, all very sensible. Now your model is to integrate at least at the point of collecting and extracting and managing the repository of data. One thing I do hear people say, and I’m not saying I agree with it, but I hear people saying from time to time things that sound like ‘fraud systems should be separate from revenue assurance systems‘ or that ‘revenue assurance systems should be kept separate from business intelligence‘. Do you find that customers ever say that to you, and how do you respond if they do?

Benny: We can make our way either way. It is loosely-coupled. I can put the revenue assurance into one department, and the business intelligence into others. They will get separate dashboards. The fact the CDRs service both applications is not important. It is the same with data mining or data warehouse projects. All the operators are going to a point where they will have one place for storing all the data they are working on. It doesn’t really say those are not two different systems. We can also go with the other story saying you see more benefit if you get interoperability of systems. Let’s take the bypass issue of fraud. Sometimes there are cases you can detect on fraud systems and you can detect on revenue assurance systems. You don’t want your two separate teams to work on the same problem. If you connect the systems so the alert gives you a hint: ‘you have now an alert on bypass, but be aware that the revenue assurance team has already been alerted from a different control two days ago‘. You will be able to save money. There is a benefit working on systems that can share information. The executives will certainly understand that, even if the two separate departments see themselves as separate.

Eric: On the call, there was a question asked about the market and how the market is developing for revenue assurance and for fraud. The answer was that you saw growth in revenue assurance, and the fraud market being stable. Is it that the revenue assurance market is growing overall, and the fraud market is stable overall, or is it that your share of revenue assurance is growing and stable in the fraud market?

Benny: You cannot generalize such an issue. Maybe if you take the median of all geographies, it is fair to say the fraud business is stable. But there are some geographies like Africa and Eastern Europe, with focus on the former Soviet Union countries, where the fraud market is not stable, it is increasing. In Northern America and Western Europe the fraud market is stable, maybe even less than that. It is fair to say the fraud market is overall stable. Indeed, the revenue assurance market is growing faster, even on a geographical basis. But in some geographies the customers are less matured, less progressed on their operations, and want to tackle fraud before they tackle revenue assurance. That’s why the IRM concept is very flexible and we believe unique for us. You can start wherever you want, but you are flexible to grow into tackling all the issues when you decide to grow. We say that revenue management – not specifically revenue assurance or fraud or etc – we say that revenue management is definitely growing everywhere.

Eric: Tell me if you think this is right or wrong. It sounds almost as though revenue assurance is still a less mature market than fraud, which is why it has growth potential, but that means it may be easier for you sometimes to sell into a customer the fraud product first, because that is an easier product for the customer to understand, and then sell the revenue assurance product. Is that fair to say you would typically expect to sell the fraud product first?

Benny: Yes, but again, related to geography. Everything you said now is 100% right if we speak about Africa. If we speak about North America, then it’s the opposite.

Eric: Oh really?

Benny: We know that in North America fraud is less of a problem than in developing countries. In North America and Western Europe, revenue assurance is now more positively perceived. In Africa, South America, the former Soviet Union, APAC, in less matured operators – not necessarily less developed countries – they want to tackle fraud first. It depends on the type of the subscriber base in the operator. Fraud is a low-hanging fruit issue. Then you can move on to revenue assurance and monitoring processes. In countries like North America, with the overall trend towards accounting visibility and being on top of the numbers, they are more driven by control and monitoring.

Eric: You touched upon the differences in the market geographies there. On the results call you discussed the deal with China Mobile, where you’re rolling out to a second region now. Each province in China is like the size of most countries. Are you expecting that you will continue to roll out to more regions with China Mobile in the long run?

Benny: Yes, we definitely expect to roll out more regions with China Mobile and we are also targeting the other operators in China as well. The Olympic Games starts this Friday so, during the summer we don’t expect big news. You know, everybody that dealt with China knows it’s about first breaking the confidence issue, then you can roll out relatively fast. It took us a little bit of time to show them on the first installation that we do have a product, that it actually works, that everything is according to their requests, that our local partner is actually providing what we need, that the relationship with Motorola – it’s a joint deal with Motorola – that our relationship with Motorola is very solid, that Motorola have the education on our system that they will be able to provide all the answers needed… Once we did it successfully on the first project, the second was a lot easier. We expect the next opportunity to be faster and easier. Just to relate to your statement about the size of the installation: yes, China is very big. They have over thirty provinces that we can potentially roll out to. The provinces that we’ve implemented so far were not one of the three biggest. Of course we have our hopes on that and we look forward to that.

Eric: Can you talk at all about the specific challenges in terms of what the Chinese customers need, or the specific challenges for you as a company, in terms of providing services and products into China?

Benny: It’s not unique to China, but it’s very important for them to be close to the customer. It’s not only about physical difference, it’s also about culture. We have not only a branch in Guangzhou in China, but we also did this deal together with Motorola China. They know they are working with Chinese people. They know the knowledge is dominantly in China. They don’t need to get the support from Israel. They want to know they are able to speak with Chinese people on Chinese time, knowing the Chinese culture, understanding each other. All the knowledge is there, all the local support is in China. Italians would like to do business with Italians, French with French. In China, more so. We have AT&T as a customer, it wasn’t really important to them. We had a very successful Proof of Concept there. Three other vendors did the Proof of Concept. Only we completed the Proof of Concept on time and successfully. AT&T didn’t really mind that all the support came out of Israel. They witnessed the fact that we can meet the SLA, they did not care that the knowledge base was outside of the US. For China Mobile, it was very very important to have it in China.

Eric: I see. One thing I was thinking of was that some big companies over the years have had concerns when dealing with China over control and respect of intellectual property. In your business, intellectual property is a large factor in your commercial advantage relative to your rivals. Have you had to do anything special to protect your intellectual property rights as part of dealing with Chinese businesses?

Benny: No, not at all. Of course, when we first decided to go into China, all those issues came up and we had to evaluate the risk and decide on our position. The fact that we are working with big operators and the fact that we are working with a channel like Motorola China, a Chinese company but with all the ethics and business codes of Motorola worldwide, gives us comfort. Nevertheless if you want to do business in China, you have to accept the Chinese culture. You need to decide if you want to play the game. If you want to play the game, everything can grow to numbers you never dreamed of. If you don’t want to accept they are different to Europe or the US, you cannot do business in China.

Eric: Moving to more general sales and trends in future, in 2007 about half of your sales came through system integrators and various distributor channels. Are you expecting that ratio to remain constant this year, or do you expect that to change over time?

Benny: I can give you the trivial answer. We are increasing the number of partners and channels to our business. We want to grow the direct sales as well. Channels are very important because they give us global reach. They are very important. But we also want to increase our direct business as well. I don’t want it to change, but I want both parts to grow.

Eric: You mentioned the social network you’ve set up. Do you think this will help you to drive increased direct sales?

Benny: Yes, but it will also help us to drive indirect sales. It will bring the knowledge closer to the users. They will get more opportunity to know that we are facilitating the way they will be able to share information between ECtel customers but also with customers of other companies. We want to allow them to share information. Today it’s not only about systems. It is also about information and the ability to share. I don’t care if you are my competitor’s user. I want you to be able to share knowledge with other colleagues, even if they are my customers, so you will be able to do your work better. That’s the reason behind it. It’s an ECtel environment, but it’s not related to ECtel promoting our products. In every marketing move you believe it will enable you to position you better in the market, to brand you better in the market etc, and that eventually it will gain more customers for you, but this first comes from the social sharing perspective and not from increasing sales.

Eric: Some of your competitors are doing similar things. Subex has for some time now had its user forums and its user forum meetings, where they invite people to various exotic locations to meet and to discuss things. cVidya has been very heavily involved with the TM Forum. How do you distinguish what you’re doing with the social network and what your competitors are doing?

Benny: We have several ideas, but you will have to wait and see when we launch it. We believe we are doing something that is very unique, very special. It is not only about putting up a forum and allowing people to ask questions and to have answers. We believe that we are going to introduce something that will also evolve in time. Maybe on our next call I will pinpoint what is not being done so far in the industry.

Eric: Do you have a launch date in mind?

Benny: The launch date is the end of the summer, which is early September, and I’m sure you will know about it as well.

Eric: I look forward to finding out more. One last question. Competitor pressure, consolidation, and the pressure to discount prices: do you think that consolidation will be a good thing because it will reduce pressure to discount prices, or a risk because it may create larger competitors?

Benny: There are two sides to consolidation, as you have mentioned. It reduces competition but creates a bigger competitor. When it creates a bigger competitor, it takes time for the competitor to reorganize itself and integrate the systems into one offering. We know what happened to Subex after they bought Syndesis. They chose to go into the OSS world, we are focusing on the BSS world. Predominantly, I am happy that they decided to have OSS also within their business, because I think it is a bit of defocusing from BSS. In general, we don’t see consolidation as a risk factor unless the consolidation was done by the bigger players. We are working on our strategy of the IRM portfolio, and we believe even the consolidations are not giving a full answer to our strategy.

Eric: So although there is intense competitive pressure, you’re expecting with the way your strategy is, and the way consolidation is working, you do not need to alter your strategy, and that overall you expect price pressure to reduce as companies consolidate.

Benny: Not in a major way. Of course we always have to listen to the market trends and what other companies are doing and amend our strategy or tactics slightly to tackle specific issues. It also depends on specific companies that we are competing with. In general, we are working according to our strategy, and we believe it gives us an advantage even in the face of consolidation.

Eric: I’ve taken up a lot of your time today, Benny, and I really appreciate it.

Benny: Thank you for the time. I’ll be happy to speak with you whenever you want.

Eric: Many thanks.

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.