Archive for the Results Category

Subex, the Indian business assurance vendor, has released their results for the financial year ending 31st March 2014. The topline news is good: sales are up 10.6% to INR3.4bn (USD58mn). Operating expenditures are down. Employee and subcontractor costs were cut again, reduced by 13% to INR1.79bn (USD30.5mn). As a consequence, EBITDA was up 77.7% year-on-year, after stripping out INR168mn (USD2.9mn) of forex losses as the US dollar strengthened against the Indian rupee.

From the data available, Subex’s revenue streams appear to be pretty well balanced. Managed services now generate 27% of revenues, whilst 40% comes from implementation and licences, and 33% from support. In short, customers want Subex’s products and services, and they can be delivered at a cost which leaves a viable operating margin. I calculate EBITDA margin to be 24.9%, excluding forex losses but including the INR22mn (USD375K) bad debt provision that had been classified as exceptional in the accounts.

That, put simply, is the good news from Subex. The bad news is that this Indian ox continues to pull a heavy load. In the past, Subex’s profits were magnified by its investors’ appetite for risk, resulting in rapid growth through acquisition. Now the investors are slowly grinding out returns in exchange for their continuing stake in the business. Subex’s operating surplus was cancelled out by INR675mn (USD12mn) of finance costs, up 30% since FY13. After tax, Subex made a loss of INR116mn (USD2mn) for the year.

Subex is a fundamentally sound business. Though it lacks glamour and is weighed down, this ox is a strong animal. It is a useful beast of burden; its owners will want to keep it in healthy condition. Ignoring the possibility of disruptive technologies upsetting the market, I expect that telco business assurance is evolving towards a duopoly where the global brands and presence of WeDo and Subex will give them efficiencies in sales, marketing, cost and research that steadily wear down their mid-size rivals. The top two firms will increasingly dominate sales to large network operators, whilst much smaller agile players succeed at the opposite end of the spectrum by pitching low cost solutions to an expanding number of virtual networks. This will leave the mid-sized vendors uncomfortably squeezed on both sides, and most in need of finding a distinctive strategic path that goes beyond mimicking the suite of offerings pushed by the big two.

They say you should invest in what you know, but the truth is that I would not invest in telco business assurance. The irony is that business assurance promises rapid returns for any telco that aggressively tackles leakage and fraud, but the vendors who sell business assurance solutions only tend to receive a small fraction of that benefit. There is no contradiction here: the value of a product as perceived by a customer need not match the real value generated for the customer by that product. Business assurance continues to be a difficult sales proposition, and even though telco customers are far more educated than before, they are spoiled by having too many suppliers to choose from. But whilst I would not invest in business assurance, that does not mean investors should look to cut and run. On the contrary, now that they have taken a stake, they should hunker down and play the long game. Telcos make mistakes that cost money. They made mistakes ten years ago, and they will make mistakes ten years from now. Subex satisfies a need that is not going to go away. And with some imagination, they may be able to educate markets to see the value in addressing other kinds of mistakes that went unnoticed before, such as sub-optimal capital expenditure on network assets. Subex is not the kind of business that will rocket-charge any investor’s portfolio, but the right choice is to stick with this Indian ox. It has the strength to keep moving reliably forward.

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WeDo, the Portuguese suppliers of business assurance software, have announced their FY13 revenues were EUR61.5mn (USD83mn), up 12% compared to the previous year. This continued growth consolidates their position as market leaders. EBITDA rose 36% to EUR11.8mn (USD16mn). There was no mention of profits.

The company identified Southern Europe, Middle East and Africa as the regions that contributed most to growth. They also reiterated their strategy of expanding sales to the retail, energy and finance industries, claiming they now have 31 non-telco customers. On Thursday, Chief Marketing Officer Sergio Silvestre separately mentioned that sales to non-telecoms customers now generates about 10% of WeDo’s revenues. WeDo’s continued expansion outside of telecoms comes as no surprise; in January the firm created a new VP role with responsibility for developing their business outside of telecoms.

WeDo’s strong performance suggests their corporate strategy is working and hence needs little change, or further analysis. There are signs that the market is contracting overall, which makes WeDo’s results especially impressive. In his choice of words for the press release, CFO Fernando Videira hinted at some underlying softness in the market (my emphasis):

This level of continued innovation, top line growth, as well as sustainable EBITDA growth, is evidence that WeDo will continue to gain market share and to be the biggest and most robust player in Revenue Assurance and Fraud Management software in the world.

Videira went on to signal the scale of WeDo’s ambition, saying he wanted revenues to reach USD100mn by 2015. It is also worth noting that WeDo’s messages have changed subtly over the years. In the past, they asserted themselves to be leaders in the sphere of revenue assurance, excluding fraud management. Now they clearly prefer to measure their performance against the combined RA and FMS market.

Having attained the position of market leader, WeDo can exploit the advantages this confers, compared to their rivals. As the customer base grows, the same expenditure on maintaining and developing products represents a smaller proportion of the revenues they receive. WeDo also benefits from the viral marketing effect of loyal customers recommending WeDo to their peers, or seeking to purchase relevant WeDo products when they move to a new employer. WeDo’s keenness to tell telco people about their non-telco sales may partly be motivated by the hope that practitioners will continue to advocate business assurance and WeDo, even if they leave telecoms to take jobs in other sectors.

In summary, WeDo’s strategy is established, coherent, and appears to be succeeding. That allows their management team to focus on execution, making high quality sales, and sustainably improving their income.

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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.

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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.

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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.

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