Since its turnaround, Subex has continued to plot an upward course. At the end of July, the Indian giant posted Q1 results that reaffirmed the healthy state of the business; see Subex’s summary here. Following that, August has seen Subex make six positive news announcements in the space of just sixteen days. On the sales front, Subex told us that:

• A Malaysian CSP has renewed their Managed Services contract for Subex’s ROC Revenue Assurance;
• They will supply RA and FMS systems to African group Econet;
• Subex has partnered with IBM India to supply ROC Interconnect Billing to IDEA Cellular, the Indian Mobile CSP;
• Eagle Mobile of Albania has bought Subex’s FMS; and
• Mobinil, the Egyptian Mobile CSP, has replaced their old fraud management system with ROC Fraud Management.

Regarding the last story, further research indicates that Mobinil’s old Fraud Management system was supplied by HP (see here). Two major multinational groups have a significant stake in Mobinil: France Telecom and Egypt’s Orascom. The loss of Mobinil will be a blow for HP whilst it potentially opens more doors for Subex.

I cannot remember ever seeing a similar vendor announce so many sales in such a short space of time. However, perhaps the most positive signal about Subex’s long-term future is the news they will receive an equity injection from the investment vehicle of an unnamed telecom operator; see the press release here. A maximum of 8 million shares will be issued. The agreed price of Rs. 80 per share represents a premium of roughly 45% to the current market. If all 8 million shares are issued, the value of the investment will be approximately USD 13.5 million at current exchange rates. The shares will be issued following AGM approval on September 13. Subash Menon, boss and founder of Subex said of the deal:

This investment from an entity that understands the telecom software sector well vindicates our stand on the bright future of the company. They were particularly impressed with our positioning and strategy around Revenue Operations Centre (ROC) and Managed Services. The fact that they are investing at a price that is significantly higher than the current market price establishes their confidence in the company.

Subex are enjoying an Indian summer. Now it is time for them to make hay, whilst the sun shines.

It has been a tremendous start of the year for Subash Menon, boss and founder of Subex. He has negotiated his way out of the looming overhang of FCCBs, has slimmed the business after the takeover of Syndesis and has got Subex back into profit. So how does he follow up that hat trick of successes? By putting his money where his mouth is and showing his faith in his own business. Like other shareholders, Subash will see his stake in the company diluted by the deal with owners of the FCCBs. To address this, he has bought newly-issued shares, as he explains in this interview. You can also see the video of the interview here. Buying shares is good – it shows confidence in his company – but Subash went a step further still. The shares will be bought at a premium to the market of 30%. In other words, he is buying not at the current market rate, but at the same rate as the FCCB holders agreed as the conversion price for their bonds. It is a magnanimous gesture, an impeccable example of good governance, and a supreme statement about the future of Subex. I take my hat off to Subash Menon.

More good news for Subex followed soon after, with the announcement of a multi-million dollar order for their cost management software by a North American Tier 1 operator. To complete the second hat trick, it looks like the majority of analysts are upbeat about the future share price of Subex, which has had its ups and downs. They are not all positive, but some analysts are very positive about Subex’s future; see here, here and here.

The leaner, meaner Subex has posted good results for Q3. A while ago, Subex press releases liked to talk about the top line, not the bottom line. Now the focus has reversed. The leaner Subex looks like its annual revenues will be much closer to USD100m than the USD120m+ that had been its forecast only a few years ago. But now that Subex has a much lower cost base, profits and EBITDA have rejuvenated. In Q3 Subex made a profit after tax of USD 8.7m over sales of USD 25.1m. With Subex’s management saying they have resolved their FCC overhang, they can look forward with increased confidence thanks to their strong fundamentals.

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Subex, the Indian revenue assurance and service activation vendor, has announced poor figures for its second quarter. You can read the press release from Subex here and the results here. Despite the optimistic tone of the press release, there is no hiding that the days when Subex forecast annual revenues in excess of USD120m have now receded from memory. Annual turnover of USD100m now looks to be a tough stretch for the would-be worldbeater. Halfway through its financial year, Subex has net consolidated revenue of USD48m, down 15.4% year-on-year. Q2 revenues were USD22.4m, a fall of 22.7% year-on-year. Reducing costs led to a small increase in EBITDA for the quarter when measured year-on-year, and improvement in the earnings ratios. However, yet another increase in interest costs left Subex with only the slimmest of profits before tax and exceptional items. Swapping from the consolidated figures to those of the core company, Subex Ltd, shows that a much higher proportion of the group’s revenues and costs are now going through the books of Subex Ltd. This confirms the impression that management has reigned in costs by concentrating production from its Indian base.

In the press release Subash Menon noted that

Business has stabilized along with order intake, and the future looks positive.

Stability is good, especially if revenues look to have reached their plateau and further sales are tough to find in a viciously competitive marketplace. Breaking even is a major turnaround from the disastrous losses Subex reported in 2008. However, current optimism is a lot more muted than that enjoyed during the heady days of growth where Subex’s star was ascending. The question for the revenue assurance market is whether Subex has reached its zenith and will have to settle with a new, lower level of ongoing sales, and what that means for its competitors.

Israeli RA vendors ECtel bounced back from a poor Q1, this week reporting much better figures for Q2. Revenues for Q2 were US$5.7m, up from US$3.4m last quarter, but down on the US$6.7m generated in Q2 of 2008. Gross margin was good, at 60%. Costs were cut, and there were three contracts from new customers in addition to a reported 20+ orders from existing customers. However, ECtel continued to burn cash, reducing their cash pile by another US$0.5m over the quarter, though this still leaves them with US$14.3m in reserve. At that burn rate, they can cope for another 28 months. Once again, ECtel stated their intention of achieving breakeven in the second half of the year.

Subash Menon, boss and founder of Subex, tried to make the best of the release of Subex’s year end results. There were many positives. The business failed to achieve its profits guidance for a second year in a row, but the underlying FY09 results were significantly better than they were in FY08. Costs have been brought under control by relocating more work to India. Revenues were up by 15% compared to the year before, at nearly US$121m. The business has recovered to a level which looks like it can sustainably deliver positive operating cashflows and profits. Although this level of profitability is far more modest than the expectations management set during Subex’s golden years, at least it shows that Subex’s core business strategy is viable. Over the year, increased sales in EMEA compensated for a fall in sales in APAC. Cash collection was very good, and the business had a strong fourth quarter.

Unfortunately for Subash Menon, there also seemed to be a dark cloud for every bright spot in the company’s performance. To begin with, Subex’s order book is significantly thinner than it was at the previous year end. Whilst orders for its revenue management products were roughly equal to the previous year, orders for its fulfillment systems were well down. Over the year, new fulfillment orders were down 38% compared to FY08, and in the final quarter they nearly flatlined, with just US$0.7m of FAS orders in Q409 compared to US$7m in Q408. Secondly, though not discussed during the investor’s call, Subex’s largest source of revenues is still the Global Services division of BT. Although there is no reason to believe BT will not honour its contract with Subex, it cannot be good for Subex to be earning a large proportion of its income from a business that is in crisis. BT Global is in deep trouble and needs radical surgery if it is to be saved. Given the uncertainties about BT Global, Subex needs to diversify its customer base and become less reliant on its biggest customer.

One disappointment that had to be discussed during the results call was the whopping US$40m write-down of exchange losses on Subex’s Foreign Currency Convertible Bonds (FCCBs). This exceptional item drowned the slim operating profit of US$6m. That said, Subex is not in the Forex business, and this loss is not a significant reflection on the health of its business. Taking a big hit this year may be a smart move, if it helps backers to stay focused on improvements in Subex’s fundamentals. By far the darkest cloud for Subex is the one hanging over its future, with the US$180m of FCCBs due for redemption in 2012. Even the most wildly optimistic predictions for Subex still lead to a black hole of uncertainty as to what will happen to the company as the FCCB due date nears. The slide in Subex’s share price means the FCCBs will not be converted into equity. Subex does not generate enough cash to be able to redeem the FCCBs. That is obvious, and Subash Menon did not attempt to hide the facts during the investor’s call:

if one were to look at cash flows for the next three years which is when the debt would be…the FCCBs would be due, we certainly would not have cash flows anywhere near what is required for [redeeming the] FCCBs, certainly not, we will be way behind…

That means Subex will have to make an alternative arrangement to cover the cash outflow when it becomes due. Unless Subex can find a buyer with big pockets, Subex will need to arrange new debt to replace the FCCBs. Even if Subex can borrow the amount needed, the outcome will almost certainly mean servicing higher interest payments. This in turn will leave much less free cash to reinvest in the business or to return to shareholders. This is a very serious problem and it is not going to go away. However, Subash Menon currently has no advice to give. During the results call, he repeated the same basic message, which was:

FCCB is still an open issue, I don’t have anything to share on that front. I do understand that that is a major concern from everybody…

The FCCBs hang over Subex’s future. As we get closer to 2012, more and more people will be asking about Subex’s plan to deal with them. Subash Menon has enjoyed many sunny days whilst he built his world-beating business. Now a monsoon is inching towards him. He needs to find a solution to divert it or to deal with it. Whatever answer he comes up with will determine Subex’s long-term future, or even whether it has one.