Archive for the Results Category
It has taken me a while to review Subex’s results for the first quarter of FY14. That is not because they were especially complicated, or surprising. The difficulty lay with interpreting the figures, and extrapolating from them. A good forecaster knows that some circumstances are easy to forecast, based on the simplest data. Other situations are fundamentally unpredictable, no matter how much data is gathered. Sometimes you know the weather is going to be sunny all week long. At other times, professional weather forecasters cannot tell you if the evening will bring rain, no matter how much information they analysed that morning. Right now, Subex’s business model is like a complicated combination of weather fronts. The rain has stopped, but we cannot see blue skies. There are too many variables to see through the gloom, towards the future. All business involves risk, and there are many variables outside of the control of Subex’s management team. Nevertheless, stronger patterns are emerging, revealing how Subex intends to play, and win, in their chosen market. Despite the difficulty, I will try to synthesize the data I have reviewed, drawing on the Q1 FY14 results in the public domain, and a recent conversation I had with Surjeet Singh, the CEO of Subex.
On paper, the Q1 ups and downs were plain enough. Revenues were up, year-on-year, whilst only slightly (2.8%) down on Q4 FY13. EBITDA was also up year-on-year. Whilst EBITDA margin had fallen to 20% from 26% in the previous quarter, this slip is tolerable. Subex has previously, and rightly, argued that costs do not exhibit a linear relationship with revenues. If Subex has tightened the cost base to the point where they earn 20% EBITDA, even on more limited sales of around USD14M per quarter, then their business is fundamentally sustainable at an operational level. This was emphasized by Surjeet Singh in the company’s official press release, when he commented:
…we are not only profitable on a sustainable basis but also cash positive at operating level.
Or, to paraphrase Mark Twain, reports of Subex’s death have been greatly exaggerated.
Whilst the press release headlined the big positive improvement in Profit after Tax, this should be ignored because it was created by a beneficial, but uncontrollable, forex gain. As often mentioned by talkRA, forex gains and losses should always be discounted when reviewing Subex’s performance, whichever way they swing. Meanwhile, finance costs continue to be the biggest cloud in Subex’s sky. Put simply, Q1 FY14 continued the trend seen at the end of last year, where Subex almost generates an operating surplus that is large enough to cover its interest payments. Here lies the epitome of a ‘tipping point’, which is why it is difficult to predict Subex’s future. The downpour may have stopped, but the water levels are still, slowly, climbing. Subex can sail on in their current condition, but the combination of operating and finance costs continues to weigh them down, meaning that further bail-outs will be needed in future, unless the management team can find new sources of buoyancy. Subex needs, at minimum, to find a way to reliably generate an additional USD1M per quarter in revenues. That may sound easy enough, but the problem is that Subex’s core market is in decline. Whilst few would say this as plainly as I will, I believe all the data indicates that the traditional telecoms revenue assurance and fraud management markets are suffering a decline that will persist over the medium term. So at this crucial time, Subex’s management team will have to gamble on how they deploy their limited resources, in a hunt for new growth. This new growth is necessary to offset the fall in their more mature revenue streams. It will not be immediately apparent if Subex’s management team have made decisions that yield the best pay-off. However, the decisions made now will determine if Subex can change tack, becoming a long-term profitable venture, or whether they are only keeping the business afloat on an indefinite basis.
Before I further analyse Subex’s results, it is worth putting the Indian vendor’s strategic options in context with their largest rivals. WeDo, the new market leaders who overtook Subex earlier this year, have been most inclined to strategic planning. For several years, they have maintained a consistent core to their strategy. This involves reducing the inherent volatility of their exposure to a single sector, and mitigating the eventual decline of telecoms RA and fraud management, by diversifying into providing similar products and services to new sectors like retail and banking. In many ways, this is a classic textbook strategic path, which is not to say it is an easy choice. On the contrary, it takes time and ongoing investment to develop new markets and make contacts with potential customers. Though Subex has occasionally talked about sales outside of telecoms, I believe their management team is correct to focus on looking for more revenues from telcos. WeDo benefits from a far more extensive web of business relationships that it can lever. Subex needs to capitalize on their current wide penetration and good relationships with telcos, in order to generate additional revenues more quickly than if they now started to pursue customers outside of telecoms.
cVidya, consistently third behind Subex and WeDo in terms of market share, takes the opposite approach to WeDo. Whilst cVidya has been around for over a decade, they are run like a firm which is always seeking to maximize short-term returns. This means they spend proportionately more on marketing, and less on developing products and services (whether for telcos or any other customers). When they do invest in development, this has to be justified by the belief they will make a rapid return. As such, they tend to take a scattergun approach to development, seeking to make many small developments that maximize attention and maximize the total number of prospective customers, but without ever developing products or services that have any lasting competitive advantage. As a consequence, cVidya’s sales are most driven by price, which places them most at risk from market volatility. In short, cVidya gamble often but little, which gives them the possibility of unexpected wins but also places a limit on their winnings. For a while, it felt that Subex’s revamped management team might have decided to closely emulate cVidya’s approach. That would have created a very unpredictable dynamic in this market, risking the possibility of accelerated downward pressure on prices and a more rapid decline overall. And the prospects for new growth would have been put in jeopardy because even less resources would have been available to hunt for new revenue streams. However, Subex is now giving stronger signs of pulling back from this approach and plotting a middle course that best suits their current strengths.
Subex’s strategy has long included an strong theme of translating sales of licensed software into sales of managed services. Though the data is patchy, I believe this is an area where Subex has maintained a lead over its rivals. It makes sense for Subex to continue to pursue this key strategic goal. Surjeet emphasized the importance of managed services during our conversation. The point was similarly made by COO Vinod Kumar, both when we last spoke, and also in the Q1 results press release:
The first quarter of this financial year has been a record quarter for us, having won more than 10 key Managed Services contracts for our core offerings, mostly for Tier 1 operators in North America and Europe region.
It is also worth observing that a customer who enters into a managed service relationship is less likely to want this publicized than a customer of a greenfield system installation. As such, Subex may be quietly consolidating their lead in the delivery of managed services. However well they are doing, they should continue to prioritize sales of managed services. As discussed previously on talkRA, multi-year contracts for managed services are a good way for Subex to counter volatility and decline in the marketplace.
However, my conversation with Surjeet underlined Subex’s strategic commitment to developing a well-defined series of new offerings that will drive future revenue growth. The crucial point here is that no business can strategically pursue every possible source of growth. Management has to focus on a limited number of growth avenues, in order to concentrate their limited resources in ways that can be turned into meaningful competitive advantage. The idea that Subex needs to find a new basis for competitive advantage was demonstrated in Surjeet’s choice of words when we spoke. He linked the ROC – the Revenue Operations Centre, a manifestation of a comprehensive suite of Subex products – to what he called “Subex 1.0″. Crucially, Surjeet is looking to transform his company into “Subex 2.0″.
So what is included in the inventory of Subex 2.0? However much I would like them to, Subex’s management is not going to tell me everything. Surjeet told me that Subex is working to ‘co-create’ new products with a select group of customers, but he would not tell me more. What I do know is how I would refocus Subex’s development efforts. Whatever the merits of developments like Zen, I believe such add-on functionality is unlikely to capture much imagination, and cannot spearhead significant volumes of additional sales in a declining market. In contrast, developing and promoting their Asset Assurance product is a bigger, bolder move. Whilst the acquisition of Syndesis was the cause of many of Subex’s problems, there should be one positive legacy in the form of superior technical understanding of how to manage network inventory. Given the scale of the capex involved, Asset Assurance may generate enormous sales, depending on the quality and availability of rival offerings. To date, I have seen little effort to identify and educate potential customers about the use of data to improve network capex utilization. Now Subex is sending clear signals about their intention to grow revenues from Asset Assurance. In the press release for the Q1 results, Asset Assurance was mentioned by both Surjeet Singh and Vinod Kumar. This is from Surjeet’s quote:
Strategically, we are now expanding to help our customers manage network Capex through our path-breaking Asset Assurance portfolio which we believe will provide growth impetus to the company in coming period.
Will Asset Assurance prove to be a big winner? There is another old saying which predates Mark Twain, but which Twain used in Huckleberry Finn:
…you pays your money and you takes your choice!
Nobody can say whether Asset Assurance will be as profitable as Subex hopes. In business, you have to take risks, deciding how the business will spend its money in the never-ending pursuit of increased profit. What we can now say, with much greater certainty, is that Subex’s management team have identified where they will act decisively. There may be more rain ahead, but they are controlling what they can control, by plotting their own, distinctive, strategic course.
Posted by: Eric in News, Results
During a busy week for talkRA, Subex slipped out their dreadful annual results. The full and detailed analysis will have to wait until next week, but the chief conclusion does not require much analysis. The headline news is that Subex generated a pathetic USD61mn of sales in FY13, down 31% on FY12. To put this into further context, Subex was generating USD120mn in annual revenues at their peak, and I still thought they should be orbiting in roughly in the USD90mn-USD100mn band as recently as a year ago. Given that rivals WeDo announced annual sales were USD71mn, up 20% year-on-year, the natural inference is that Subex’s problems are internal rather than external. The stock market seems to agree. Whatever good news rumours perked up the share price on Monday 20th May, those buyers of Subex’s shares found they had wasted their money, with the share price soon tumbling by nearly a quarter to new all-time lows.
The response of Subex’s management to this terrible news inspires less confidence than a man trying to put a sticky plaster over the hole in the Titanic’s hull. Subex CEO Surjeet Singh said:
We have successfully maintained our market leadership in Revenue Assurance and Fraud Management accordingly to leading analyst firm Gartner for the third year in a row.
That sounds like boasting how high you are, having jumped off the deck of the Titanic, plunging toward the deep and icy cold water below, blissfully unaware of the grand piano which is also falling towards the sea, just a few feet above your head. Also, it involves taking comfort from a Gartner report. This would be like paying Gartner to write a report saying I am sexier than David Beckham, George Clooney and Robert Pattinson combined, just so I can include a copy of the report inside a Valentine’s card. It may be promotional, but like Subex’s rusty old product suite, nobody is going to buy it.
Not satisfied with mentioning Gartner as cover for their awful results, Subex issued a second press release a few days later, reiterating the nonsense that they were market leaders. In that release, Vinod Kumar, COO, said:
We are extremely pleased with this validation of our leadership position in the Revenue Assurance and Fraud Management space for the third year in a row. Our perseverance and commitment, to enable telecom service providers build competitive advantage in this volatile marketplace, has firmly helped us consolidate our leadership position. We aim to continue to grow faster, strengthen our key solutions with our Managed Services offering and expand our global footprint…
Whoever does Subex’s PR needs to be fired for such counter-productive twaddle. For a start, WeDo’s USD71mn is more than Subex’s USD61mn, even before anyone argues that Subex’s contract with BT generates a lot of revenue which should not be classified as either revenue assurance or fraud management. Second, the company had a bad year and the figures went into a sharp reverse. Management palaver about perseverance (persevering with a failing business model?), consolidating a leadership position (a 31% fall in sales is not consolidation), and growing faster (what growth does he think he is talking about?), only makes Subex’s management team sound like a bunch of nincompoops who are divorced from reality. Even the supposed volatility of the marketplace could hardly explain why Subex’s sales are the lowest they have been since the acquisition of Azure in 2006.
Six months ago, I wrote that Subex’s management need to communicate a strategy to turn around their business. Since then, we have heard nothing. The conclusion is that this team have seen their ship hit the iceberg, and have no idea what to do about it. Perhaps they are hoping for the share price to finally sink so low that a buyer will swoop in and haul them back to dry land. However, there is a big difference between the scrap value of the Titanic when still afloat, and when she hits rock bottom. This management team keep waltzing around the Titanic’s ballroom, but somebody needs to change the tune.
Posted by: Eric in News, Results
When I was invited to WeDo’s London presentation of their 2012 results, I immediately jumped to two conclusions. First, I guessed the results would be okay. If the figures were poor, their CFO would not spend time and money flying to London, just to share the bad news with journalists. Second, I guessed the results would be less than spectacular. The market is difficult, price competition is fierce, and some of WeDo’s rivals are struggling. In that context, it would make sense to schmooze a few London journalists, explaining why staying in the same place is relatively good. Staying in the same place is a good result, if your business is swimming against the tide, and some of the rivals look like they are struggling to keep their heads above water. So I was very surprised when Fernando Videira, WeDo’s CFO, presented figures that were so good that they speak for themselves. Nevertheless, he kindly answered all the questions put to him by the assembled journalists, plus one (annoying, highly sceptical) blogger. The answers Fernando gave were all credible, and upbeat. Fernando also gave an excellent example of how CFOs should engage stakeholders, encouraging Q&A instead of relying on the one-way push of press releases. Transparency promotes trust. Whilst WeDo has only one shareholder – they are part of the Portuguese conglomerate Sonae group – it still makes sense to communicate financial results more broadly, in order to secure the trust of current and prospective customers.
Before I dive into the reported figures, it is worth pointing out that there is no way to tie them back to independently verified results in the public domain. Sonae group is too large to present accounts with the granularity of detail needed to drilldown to the level of WeDo. That said, WeDo gave credible explanations that were consistent with results published in previous years. In short, this sceptic looked for reasons to be sceptical, but I have to admit that WeDo’s 2012 results surpassed my expectations and I can find no reason to doubt them.
WeDo’s 2012 revenues were up 19.3% compared to 2011, at USD70.6mn. As Subex revenues are well down for the first three quarters of their financial year, it appears that WeDo are set to outstrip the total revenues of their Indian rivals. Leaderboards are less important than money, but I admit my surprise at such a dramatic transformation from previous years. And because WeDo have an appetite for more M&A, they could be establishing themselves as the new long-term leader in market share. This shows that a vendor’s products and strategy can have a very significant influence on performance, irrespective of the overall growth or decline of their market. Instead of talking about why any telco needs any and every kind of assurance, the industry conversation is subtly shifting to why customers want more of the assurance sold by some vendors, and less of the assurance sold by others.
EBITDA was well up compared to last year, rising 55% to USD11.1mn. So whatever WeDo are doing to grow revenues, they are not growing revenues through cutthroat pricing and degraded margins. When questioned about the quality of their revenues, WeDo played down any concerns that telcos have become more resistant to paying at the completion of a project. Reading between the lines, Western European telcos may be maximizing the time they take to settle, but WeDo reported no problem with rising bad debt. This is in stark contrast to how Subex took a USD5mn bad debt provision during their Q2.
In May 2012, WeDo acquired Connectiv Solutions, a US-based firm. The informal report was that roughly half of WeDo’s growth came from adding Connectiv. There was also good growth in their continuing business of supplying telcos. And WeDo also grew their non-telco sales by 80%. In a similar way, WeDo stated that results were good across all geographical regions, though they highlighted they had most overperformed in the Middle East and Africa. Perhaps chastened by the economic troubles experienced across Europe, WeDo has a clear strategy of diversifying their risk. This means pursuing growth outside of telecoms, and reducing the share of their revenues generated within Portugal.
The acquisition of Connectiv enabled the closing of deals in North America, and one of the most interesting revelations is that WeDo are now openly publicizing their desire to acquire a business in SE Asia. Ideally the target firm would be based in Indonesia or Malaysia. For obvious reasons, M&A ambitions are normally kept quiet, but after several years of unsuccessfully searching for a suitable Asian target, WeDo is prepared to tell the world, in the hope it will help them to finally achieve their goal. In case you are wondering, I forgot to ask them about the finder’s fee, but if you let me know who they should buy, I will be happy to pass on the information.
Finally, it is worth emphasizing two of WeDo’s key strategic themes. First, this is a firm that sees itself investing for its future, and investing on behalf of the rest of Sonae group. They are spending on R&D, and they are spending on developing their presence in foreign countries. They recognize that investing in their product leads to a more sustainable virtuous circle than competing on price. They are also acting as a combination of trailblazer and national champion, leading the way for other Portugese businesses who will follow in their footsteps. Second, if you invest for the future, you expect to be around long enough to reap the rewards. WeDo is as keen to promote their robustness as their growth. As somebody who has sat in telcos and contemplated the trade-off between a supplier’s price and the prospects of building a win-win relationship between customer and supplier, I received a strong impression of how WeDo’s business philosophy is integrated with their marketing. So I was half-wrong about the reasons why Fernando got on a plane to the UK, to explain WeDo’s 2012 results. But that was because he came to explain more than the results. And given what he said, I now fully understand why he wanted to talk to the press.
Posted by: Eric in News, Results
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.
Posted by: Eric in News, Results
Subex, the Indian Business Assurance firm, has announced their Q1 results for FY13. They do not make pretty reading. In the press release, Subex boss Subash Menon emphasized:
“While the business climate is definitely quite tough with strong head winds in Europe and the telecom industry experiencing bad times, we are confident of maintaining our leadership position in the Business Optimisation space. Our current quarter results have been impacted by the change in revenue recognition and this will get evened out during the year. This change was essential to be in line with the changes in our revenue model.”
This quote makes it sound like Subex may have changed their accounting policy. The impact of a change of accounting policy always needs to be reviewed with care, to determine whether the change has caused a superficial fluctuation in the reported results, or if it is being used to disguise some more fundamental shifts in business performance. And I would review the impact with care, if I could find any details about a policy change. Anywhere. And I looked. For longer than I would like. Whilst I do not expect an accounting policy change to make press release headlines, it is bad form to refer to it in the release, and then fail to give any more information. Or maybe the phrase ‘change in revenue recognition’ is being used to describe some other, vaguer, explanation for Subex’s poor results. If so, it fails to serve the purpose. There is no way to assess how much leeway to give management for a supposedly one-off poor result, if the explanation of the poor result is too vague to understand.
Because there is no additional data, I can only comment on the Q1 numbers as they stand. And to say they ‘stand’ is generous. It would be more accurate to say that the numbers are precariously leaning over and stumbling around, like a drunk on his way home from the pub. Q1 net income from operations fell to a meagre USD15m, a drop of 24.1% on the previous quarter, and down 25.7% year-on-year. Recently I blogged that Subex was in a stable orbit of generating roughly USD100m in annual revenue, but subsequent quarters will need to see a big improvement if Subex is to avoid a substantial decline in annual revenue. Product income continued to drive the overall numbers, contributing 86.5% of the revenue but precipitously fell by 26.4% since Q4 of FY12. In contrast, service revenues were flat.
Subex has previously made a habit of responding to disappointing sales figures by keeping a tight grip on costs, but they may have reached the point where further efficiencies are very hard to find. Operating expenditures were up by 4.9% since the previous quarter, due to a sharp rise of 16.1% for employee and subcontractor costs. In their press release, Subex indicated their products generated a positive EBITDA of USD1.07m, implying their services are a slight drag on EBITDA. Consolidated EBITDA was USD1m, but this seemed to be propped up by USD1.1m of ‘other’ income, which is not explained further and is up fourfold compared to the last quarter. The company’s loss before tax was USD0.7m, and the after tax loss was USD0.9m, about USD3m down on the profits generated in Q4 FY12.
These poor results follow some depressing action for Subex on the stock markets. Subex shares are currently trading at around 14 rupees (25 US cents), having fallen sharply in late July due to the dilution caused by issuing shares to address Subex’s ongoing FCCB overhang. However, this is only a footnote in a story of decline, with Subex priced as high as 50 rupees a year ago, and over 500 rupees in 2007.
Amidst the gloom, Subex were doubtless glad of some good news to please stockholders, and this comes in the form of a 5-year deal to provide the ROC RA and FMS to 14 opcos in the MTN Group; see the press release here. This must come as a disappointment to rivals such as cVidya, who had previously supplied their MoneyMap product to MTN South Africa.
It would be better not to speculate, though the signing of a multi-year deal may be a clue as to why Subash Menon thinks the ‘change in revenue recognition’ will get evened out over the rest of the year. One of the challenges in revenue recognition is to work out when out when to recognize revenue, and when to recognize losses, for contracts where the work stretches over a long period but where invoicing is infrequent. It is possible that Subex has not changed its accounting policy, and has instead suffered a hit this quarter due to anticipated losses for a large and extended contract. Normal practice is to recognize a share of the contract’s total revenue in proportion to how much of the contracted work has been completed. This is calculated at the time of preparing the accounts, to give a smoother and more meaningful figure than waiting to recognize revenue when the invoice is finally sent out. However, if it is anticipated that a contract will loss-making overall, all of the expected loss must be recognized immediately. Because Subex’s quarterly figures show just the P&L, and not the balance sheet, it is possible that Subex have presented their Q1 revenues net of a new provision for loss-making contracts. Even though the provision would dent the figures in Q1, by having taken the loss then, Subex could enjoy a relative upswing in latter quarters because the losses on ongoing contracts have already been provided for. It is worth reiterating that this is speculation, but it fits with the observation that this market is enduring intense price competition, and that lots of vendors have been tempted into signing loss-making contracts. This theory might also explain the rise in staff and subcontractor costs, because workload could have gone up because of the need to satisfy loss-making contracts. The cutthroat nature of the business assurance market was underlined by the MTN Group CFO’s comment on his deal with Subex:
“Subex was selected for this deployment after a highly competitive bidding process.”
Following the failure of Connectiva, this is a time for vendors to hang tough and try to withstand the ‘strong head winds’ that Subash Menon mentioned. It could be that other vendors are on a similar path to Connectiva, if things do not turn around. That said, sometimes it is not necessary for a business to turn things around for themselves. Sometimes the goal is staying one step ahead of the rivals, and waiting for them to fail…