In Q1, Indian RA supplier Subex presented financial results that were ‘tough’, but outgoing CEO Subash Menon promised they would get better. In Q2, the results were worse. For once, it is not hard to analyse the numbers. Revenues are down on the last quarter, and the company’s new forecast for the year suggests that Subex is two-thirds of the business it used to be. Subex’s revenues have been around USD100m, or better, for many years. The new 2012 forecast, tacked on to the end of the quarterly results, is that annual revenues will be in the narrow range of USD65m-66m.
No explanation was given for this radical contraction in Subex’s business. It is possible that Subex is struggling to satisfy contract requirements at the agreed prices. This would fit with a USD5m bad debt provision that was included amongst exceptionals. Q2 revenues fell by 5% compared to the previous quarter. When talking to investors about the Q1 results, ex-CEO Subash Menon said:
People are looking at stretched payment terms. People are looking at more checks along the way, more documentation along the way before something accrues and is due and payable and things like that. So continuing product business has definitely shrunk. And because of that, even our revenue recognition had to kind of be modified to be in line with the contract conditions that have changed. We believe what we have seen. Almost USD3 million of revenue which we could have otherwise recognized have kind of pushed into the future quarters and that exactly was the reason why our revenue this quarter is low…
…Q1 of course is the worst in that sense [of reduced revenues] and Q2 would be better but if you have to come back to the full, a very good situation will probably be by Q3 but Q2 will definitely be better than Q1 but still a bit subdued. Q3 is when we are expecting this whole thing to even out completely.
So Subex talked about a ‘kind of’ change to revenue recognition pushing USD3m of revenues from Q1 to later quarters. In contrast, the new CEO (an experienced former CFO) has provided for another USD5m of bad debt. Combining the two gives a potential adverse variance of USD8m between the revenues Subex thought they were going to make, and the cash they will actually receive. More bad news came in the form of higher costs incurred in Q2. Staff costs fell sharply, but this was more than offset by an unusually fat number in the ‘other costs’ line. And if that was not bad enough, the notes to the quarterly report reveal that Subex was served with a USD6.6m bill for unpaid taxes and associated penalties. The taxes relate to activities between 2006 and 2009. This potential liability has not been included in the numbers, as Subex is contesting the charge.
Following the collapse of Connectiva, there should be no need to point out what customers expect – but I will point it out anyway. Nobody wants to have a supplier that looks like it may go bust, and which appears to have no turnaround strategy except putting on a smile and announcing the next conference it will attend. Good sales spin is inadequate to fool savvy customers. In fact, good sales spin can rebound on suppliers, if it is not followed-up with real delivery. Right now, any current or prospective customer should ask themselves what they know about Subex’s viability as a business, how confident they are that Subex will satisfy the requirements written into a contract, and what faith they have that the company’s new leadership will turn things around. It is beyond doubt that Subex needs to find a way to rebound from this dramatic fall in earning power. Annual revenues are set to fall by a third; if nothing changes, then something should. Now is the time – the proactive window of opportunity – to inform customers what will change and how it will affect them, or why the planned changes will stabilize Subex’s business without affecting the customer. That starts by conveying Subex’s new strategy. Subex appears to have been drifting whilst trying to fix its FCCB problems, but management should now explain the company’s new direction. Otherwise, prospective and current customers should seriously consider alternative suppliers. Nobody buys one of these systems for a short period of time. Suppliers need to convey confidence in their company’s viability, and to show a realistic roadmap that makes them a good choice for the current financial year, and for future years as well. Subex’s management should act quickly to restore belief in them as market leaders. If not, they risk making matters worse.