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.