Subex, the Indian revenue assurance vendor, has released the figures for the third quarter of FY13; see their press release here.
The figures show improvement from the depressed numbers presented in the last quarter, with Q3 revenues worth USD16.6mn. A million dollar net profit was reported, reversing last quarter’s net loss. Oddly, Subex’s press release described the net profit as a 113% improvement – to describe this as a percentage improvement must surely be an error, and mistakes like this send the wrong message to numerate analysts. Half of this quarter’s net profit stemmed from a beneficial forex fluctuation, and forex swings should always be stripped out when trying to understand Subex’s underlying performance. However, even a superficial review would conclude that year-on-year revenues continue to be well down, and they are not going back to historic levels. In other words, today’s Subex is two-thirds of the business it previously appeared to be.
There was evidence of increased cost-cutting in Subex’s operations, with employee costs being squeezed further. Finance costs crept upwards. And the notes to the accounts repeated last quarter’s revelation of a USD6.6mn tax bill which the company is appealing against.
Previously I argued that Subex needs to pursue a new strategy, in order to bolster confidence in its new management. So far, these results indicate that Subex is on course to slim down to being a business that generates roughly $60mn revenues a year, with enough margin to just about break even whilst covering its current interest costs. Management may have stopped the internal bleeding and put the patient in a stable condition, but that is not the same as a turnaround to genuine business health. Some of Subex’s problems are undoubtedly due to a decline in the market for its core offerings. That begs an important question that Subex’s management team needs to answer. What markets and offerings have they identified which will generate the future growth needed to compensate for current markets and offerings that are in decline? Tough decisions are needed in tough times. It is not enough to pursue a strategy of breaking even if your core market has stopped growing. If you only do that, then one single shock – like an expected tax bill – can push the company under.
The results look at best shaky. What you have said about the need for Subex management team to start grappling with the question of what markets and offerings will support future growth holds for all RA/FM tools vendors. If the bubble has not burst yet, it is approaching the bursting point. Employee costs being cut is another worrying trend. Whilst I don’t have details of what has been cut, some advice out there holds that when things are not looking good, that is when you need your best brains around – that is also the time that you do not cut down on your marketing, advertising and other promotional costs. We recently saw what happened to Connectiva and whilst the situation at Subex and the other vendors looks far from the Connectiva mess, in this industry, 10 years is sometimes equal to 10 minutes and things can get murky pretty quickly. Generally, CSPs are no longer willing (or able) to pay as much as they used to, for automation projects because they have their own set of challenges – penetration is high, price cuts are the order of the day, customer demands are up hence cost of service is high, ARPU graphs point one way – downwards. I am not surprised that press releases of vendors announcing new contracts seem to be down to a small trickle. I rarely hear of group deals. That said, it means there is room for serious innovation and breaking new grounds. Are the vendors up for it?