Subex Losses Narrow

Subex, the revenue assurance vendor, has announced Q3 results with losses reduced from the previous quarter. Whilst the software giant based in Bangalore may have turned a corner, there is still a long way to go before the company’s profit and loss statement returns to full health. Thanks in part to the acquisition of Syndesis, Subex’s revenues have grown greatly, but so have costs. At the end of Q3 in 2005, personnel costs represented 45% of revenues. In 2006, the equivalent ratio was 59% and in 2007 personnel costs represent 72% of revenues. This has depressed margins. Other costs have also grown. Debt finance costs Subex thirteen times what it did in 2005. So whilst Subex is a much bigger business, it will need to severely slim its cost base if it is to generate strong cashflows and get EPS back to the levels enjoyed in previous years. Subex’s shareholder presentation confirms that Syndesis integration is on track and that cost restructuring is being acheived. However, it is hard to tell if cost cutting will be enough. Whilst Subex is upbeat about its order pipeline, there is no indication in the data as to whether the competitive environment is improving or worsening. If Subex has reduced prices to secure its orders, then margins will be eroded at a fundamental level which cannot be easily compensated for through cost reduction. However, if competition is eroding margins, then Subex’s competitors will be in the same boat. Subex at least has the right strategy for dealing with stormy weather. So long as it can keep cashflows on an even keel, building and diversifying its revenue streams is the right strategy.