Subex Cut Costs to Defend Profits as Revenues Fall

The title of this article says everything you really need to know about Subex’s results for the year ending March 31st 2016. Announced this week, their FY16 figures reveal a continuation of the trends manifest in previous years: management have successfully shaved expenditure in order to offset the decline in revenues.

Revenues were down 10 percent compared to last year, coming in at INR323cr (USD48mn). Investors will not be surprised given the quarterly revenue figures announced during the year, though the Q4 figures showed a slight uptick compared to those for Q3.

The drop in revenues was matched by cuts to operating expenditure. Expenses excluding finance costs and exceptional items were INR263cr (USD39mn), which was 7.2 percent less than in FY15. Forex fluctuations added to the operating costs in both years, though Subex benefited from a significantly favorable swing during the final quarter of FY16.

One potential warning sign is that the Q4 cost of hardware, software and support charges was recorded as negative in Subex’s books. Unless Subex have sold all their employees’ laptops this peculiar number reflects a reversal of excess provisions carried forward from last year. Subex will not be able to cut this category of costs any more than they already have. The hardware and software costs for FY16 were just 2.5 percent of what they were in FY15, which means that Subex has either done some clever deal-making or they no longer need computers to do their job!

Another red flag relates to employee costs. These costs consume 55 percent of revenues, and the problem with this category of expenditure is that people really want their cash or they tend to stop working. Staff and subcontractor costs were up by 7.6 percent compared to FY15. However, the costs would have been higher if it were not for the reversal of provisions for employee incentives that are no longer required. It is not clear why such provisions would be reversed but we might speculate the reasons will either be that staff are not being paid bonuses, staff are accepting cuts to their remuneration packages, or headcount is being cut.

Finance costs were also reduced, weighing in at INR46cr (USD7mn). This represented a reduction of 24 percent compared to FY15. As a consequence, the profit before exceptionals was little changed since last year at INR14.7cr (USD2.2mn).

The major coup for the business was that it successfully persuaded most of its remaining foreign currency convertible bond (FCCB) holders to convert their debt into equity. Surjeet Singh, Managing Director and CEO, observed that:

…Subex has been able to convert [the] majority of its FCCB debt into equity. With this, the long term debt overhang and related interest cost on the balance sheet of the company is substantially removed. This was a complex process and is a significant milestone for [the] future of Subex as this shall provide much needed avenues for investment in the core business and enable long term growth…

He will not get much argument from me. The disastrous acquisition of Canadian business Syndesis left the Indian vendor straddled with a mountain of debt. The hope of converting this debt into equity was soon dashed as Syndesis proved to be highly overvalued and every uncontrollable factor swung against Subex. This left Subex carrying the debt burden for much longer than they anticipated, though they progressively renegotiated terms with the FCCB holders to ensure the business remained solvent.

Subex will benefit from this weight finally being lifted from its back, which also resulted in a very large one-off exceptional gain as the accrued FCCB interest expenditure was reversed. However, this boost masked a considerable write-down in the carrying value of Subex’s American subsidiary. An impairment provision of INR89cr (USD13mn) suggests that Subex’s plan to generate substantial growth in this region has come to an effective end. In contrast there was no write-down of the investment in Subex’s UK-based subsidiary.

The positives in Subex’s press release concentrated on the continued transition towards predictable revenues generated from long-term managed service contracts. This is a positive for the firm, because it means the business can plan for the future with some confidence, and investors know they can rely on these contracts to generate sustained income. On the other hand, this news also fits with a picture of steady retrenchment. Subex is more secure because it knows existing customers will be tied to it for years, but there are few signs they are rediscovering the ability to make new sales and enjoy regional expansion of a sort that was common during their golden phase.

Cleared of its FCCB burden, some will speculate that a purchaser may now swoop in to acquire Subex. However, any potential buyer must look at the market cap and ask if the share price is truly representative of the value of the company, or if it is still being buoyed up by speculative investors. The market cap is currently around INR500cr (USD74mn). If we put this into the context of Amdocs’ acquisition of cVidya earlier this year then I believe the Indian firm is still trading at a premium to its real market value. Whilst the restructuring of the FCCBs is a relief, and the long-term contracts represent a reliable source of future cash inflows, this year’s figures suggest Subex would need a significant turnaround to recapture the USD60mn per year revenues it previously attained and had long surpassed. Any potential purchaser would need to realize considerable synergies in order to generate consistent profits that supported the current stock market valuation, especially as this year’s figures were boosted by some one-off positives that will not be repeated in future.

In the parlance of stock market analysts Subex should be considered a ‘hold’, rather than a ‘buy’. Whilst revenues are down the management team continues to show itself adept at grinding out profits. I expect they will continue to do so, despite the uncertainties and headwinds they face. But investors should be under no illusions; Subex’s market is only fit for grinders, and is not creating shooting stars like it once did. There is no sign that Subex will return to the stellar growth that once led to revenues over USD120mn per year and which encouraged its top team to go on a global shopping spree for other technology firms. This business is sound, and it should persist. But anyone hoping to get rich quick should probably think again.

Eric Priezkalns
Eric Priezkalns
Eric is a recognized expert on communications risk and assurance. He was Director of Risk Management for Qatar Telecom and has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and others.   Eric was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He was a founding member of Qatar's National Committee for Internet Safety and the first leader of the TM Forum's Enterprise Risk Management team. Eric currently sits on the committee of the Risk & Assurance Group, and is an editorial advisor to Black Swan. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.   Commsrisk is edited by Eric. Look here for more about Eric's history as editor.
  • ram bhansal

    Very interesting article Eric.

    I have about 10,000 shares of this organization and all the while, it has given me nothing but a big donut….

    Subex as an organization has just been directing all its efforts into clearing of the debts. Very little effort has gone in bringing out newer products or solutions. All of their products are nothing but old vine in a new bottle.

    I do know for a fact that many of the bright employees have left Subex for greener pastures, as an example the departure of their Sales Head. So your point on the reversal of bonuses can be connected to some departures of such. Time will tell us how many more departures will soon be seen

    One point I would like to ask here is, what did you mean when you said there is no write down in the subsidiary of Subex UK ? As I understand they don’t have a setup in the UK anymore. I believe its just a sales office. Maybe I am wrong.

    If you investigate deep into their customer kitty, there is a not a single new customer that has come in. A lot of flash news about new customers being roped into their kitty makes headlines regularly, but I think it is just a humbug.

    • Hi Ram, thanks for sharing your views.

      I don’t have a complete picture of what Subex’s UK subsidiary does, but I guess that revenues for some major clients like BT are channeled through that entity. I would also guess that there is goodwill on the balance sheet for both Subex UK and Subex Americas because these entities date back to the acquisition of Azure and Syndesis respectively. If you look at note 5 to the consolidated results you will see the goodwill relating to Subex UK was assessed like it had been for Subex Americas (see note 4iii) but they concluded that no impairment provision was necessary.

      Continuing the guesswork, the still considerable carrying value of goodwill for Subex UK probably reflects the confidence that Subex’s contracts with BT will continue to generate a significant amount of cash in the foreseeable future. Now that I think about these numbers again, there would be an argument that a purchase of Subex could be made to work if a daring investor was prepared to buy the whole of Subex, then spin-off the BT contracts into a well-defined unit, and then sell that BT-facing unit to the highest bidder. Such a purchaser might be able to release hidden value, and based on the carrying value of Subex UK, the sale of the BT unit might finance their acquisition of the whole of Subex, meaning the purchaser would effectively get the remainder of Subex for free.

  • anonymous

    I don’t think it is right to single out a stock and say it hasn’t given any returns here. I had shares of spicejet , SBI and other banks which for a while didn’t yield anything. There are two things one can do other than complaining 1. Be a part of the Subex ecosystem and help develop it 2. Sell the share and buy an Infosys or a TCS that will give assured returns. A stock holder has more responsibilities than just buying it. You are a part owner of the company. Try and help it out.

    • ram bhansal

      Point noted anonymous.

      However, the debate was not just on the returns alone. For your information, I do hold shares of the companies you have mentioned and maybe a few more.

      Subex’s ecosystem has been in the garage for quite some time so “fix it again tony”.

      Read through their balance sheet and you will understand also dont forget to compare their yoy performance. You will then be in a position to understand why shareholders have their eyebrows raised.
      Granted, the current CEO has been swarmed with problems his predecessor left behind. But instead of repairing the damage, it gives me a feeling that he is further damaging the system. I have enough and more reasons to believe so..

      You mentioned Infosys, lets take the classic example of Mr.Vishal Sikka from Infosys, look at the way he has turned Infosys. A company which was at one point the darling of the stock investors lost all the reputation in a fraction of few seconds. Employee turnover was at an all time high, each and every Senior executive in the organization was receiving nothing less than brickbats.
      Instead of cutting costs and micro moniroting, Mr Sikka has looked at the grand scheme of things & changed the whole ecosystem.

      He has a matter of fact introduced new many new initiatives. I don’t need to get into the specifics as this has made enough headlines and even continues to.

      Just so that you are aware, infosys is a buy and you might want to invest in it.

      • anonymous

        Hi Ram,
        I have worked with Infosys for a while and I welcome all the changes that Sikka has brought to Infosys both from an employee perspective and an investor perspective. Employees get paid the same but they are happier with Sikka at the helm. That should keep the stock rising and investor’s happy. I have no holdings in both the companies and don’t plan to own both stocks.

        Also following the Subex story, I believe the new CEO is doing well trying to keep the company free of debt. The company seems stable. Subex is currently working on innovative products implementing Hadoop/Spark into their veins and have also created new products recently. (Source: an ex employee). Looking at the current economic status of the Telecom operators worldwide and even in India, there cant be many innovations that can be sold. There just might not be a market. The Subex attempt to sell more services should be applauded. I think they will do good in the coming years and even though it is not a “Buy” for a short term, I certainly believe it can get back to its pre 2012 levels in another 3-4 years.

        A Subex is much better than a snapdeal or a Flipkart which is mostly running in Softbank money.


        • ram bhansal

          Hi Anonymous

          Well, its nice to know that you have worked there. As a matter of fact, I have as well for a considerably long period. Correction about the employee pay though, their pay has increased and they have some excellent freebies these days. ;)

          Now, regarding Subex, we look for quick returns rather than returns coming when we are 90. Have an assessment of their stock performance since 2008, it has been in the waters since then.

          About their technology(s), there is a lot of noise about them creating products in hadoop ,Spark, pig, hive and the likes,(frankly they are not all impressive, I have seen it myself and I can say that it can be a nightmare to run their tool.) but to say that one cant have newer innovations for telecom operators across the globe is ridiculous. Subex at the moment is innovating, however their innovation has a different meaning & that is they sing the same song in different tunes.

          It is like a Bryan Adams version of summer of 69 being done in Bhangra sung by Bryan Adams himself. It is disaster in the making. For readers who might not be aware of Bhangra. Please read:

          To innovate, the requirement of creativity is a necessity. As they say, necessity is mother of all inventions, I’d say innovation. Every CEO of a company will have a marketing touch within them. So much so to say, even Mr Menon ( the x CEO had that god gifted talent in him ). This can be challenged and I will be very happy to be proven wrong about it.

          Now getting to their stability, I am not sure how stable they are. I know the employees are not paid in time. In fact they are paid in two slabs and its not during the end of the month. ( Source: Current employee). I pray this info is wrong but coming from an employee, I would think there is some element of truth.

          Finally, let flip kart loose its virginity, we’d probably know then which is a better buy.

          To conclude- I am not against Subex. Their stock will be good but I might not just be able to enjoy the benefits it brings because of its slow movement in the market.

  • ram bhansal

    That I figured, Anonymous.
    I am glad the response has been thought provoking.
    Prost !