The publication of Subex’s 31 March 2018 year end results has revealed the Indian vendor suffered a 9.2 percent fall in sales revenue compared to the previous year. Their group generated INR3.24bn (USD48.5mn) in operating revenues for FY18, down from INR3.57bn (USD53.5mn), whilst total FY18 income was INR3.26bn (USD48.7mn), down from INR3.69bn (USD55.2mn).
In previous years Subex has been able to compensate for falling revenues by cutting costs, but they were unable to do this again in FY18. The press release noted a reduction in interest costs because Subex had finally cleared the overhang from the company’s old FCCB debts, but this was more than offset by an 11 percent rise in employee costs.
Subex’s business is also subject to exchange rate fluctuations, and they were unlucky to endure a INR165mn (USD2.5mn) forex loss for FY18, which compares to an INR70mn (USD1mn) gain for FY17.
Profits before exceptionals and tax fell almost 70 percent, to INR228mn in FY18. However, the bottom line figure was flattered by an exceptional gain on the release of a forex reserve relating to a liquidated subsidiary. This also compared favorably to a very substantial exceptional loss in FY17 which was caused by the write down of goodwill. The group’s after tax profits ultimately came to INR207mn (USD3.1mn), contrasting with an after-tax loss of INR432mn (USD6.5mn) for the prior year.
Turning to the group’s balance sheet, there has been a weakening of the company’s cash position. At FY18 year end the company held cash and cash equivalents worth INR301mn (USD4.5mn), which was down 59 percent relative to the INR739mn (USD11.1mn) they held twelve months earlier. However, there was no other evidence suggesting the liquidity of the business may be strained. If management can continue to reign in working capital and keep costs under control then the business should remain profitable, despite the reduction in revenues.
Management responded to the bad news about revenues by talking up the prospects for their newer propositions, such as their entry into the IoT security market. Of the information not presented in the financial accounts, perhaps their most useful boast was telling us that Subex…
…completed the year with an increased (sic) contracted order bookings…
Subex has been far less forthcoming about what has seemingly been a major restructuring of their corporate entities. This has not been described in the year end press release nor elsewhere, but is evident by looking at the detail of the company’s filings. In previous years the bulk of revenues have been booked through Subex Limited, the parent company for Subex’s group. This changed markedly during FY18, with only small amounts of revenue still credited to Subex Limited by the fourth quarter of FY18. The substance of the restructuring is explained in a note to the accounts:
The Board of Directors of the Company in its meeting held on August 21, 2017 approved the restructuring of the Company’s business by way of transfer of its Revenue Maximization Solutions and related businesses (“RMS business”) and the Subex Secure and Analytics solutions and related businesses (“Digital business”) to its subsidiaries, Subex Assurance LLP and Subex Digital LLP (together referred to as “LLPs”), respectively, hereinafter referred to as the “Restructuring”, subject to shareholders and other requisite approvals, to achieve amongst other aspects, segregation of the Company’s business into separate verticals to facilitate greater focus on each business vertical, higher operational efficiencies, and to enhance the Company’s ability to enter into business specific partnerships and attract strategic investors at respective business levels, with an overall objective of enhancing shareholder value.
The shareholders of the Company approved the Restructuring by way of special resolution passed through postal ballot on September 23, 2017 and subsequently, the Board of Directors of the Company in its meeting held on October 4, 2017 approved November 1, 2017 to be the effective date of Restructuring.
…the Company continues to directly hold 99.99% share in the capital of, and in the profits and losses of, each of these LLPs and the entire economic interest as well as control and ownership of the RMS Business and Digital Business remains with the Company post such Restructuring.
In other words, Subex group is now organized so that its RAFM business sits in one legal entity (Subex Assurance LLP) whilst a second entity (Subex Digital LLP) has ownership of some of the other offerings, like its analytics solutions. This is jointly explained as being an aid to management focus and efficiency, whilst also improving the chances of bringing in new investors and partners. It will be interesting to see if there is some dilution of the ownership of one or other of these new business entities, and whether Subex’s management team will start discussing publicly the benefits delivered by this organizational split.
The stock market listing of Subex requires them to provide more transparent information than their competitors, and I can sympathize that this puts them at a relative disadvantage when discussing their historic performance and plans for the future. Nevertheless, it was unusual that Subex’s year end accounts had not been uploaded to their website by the time they issued their press release; previously Subex has always issued the accounts alongside the press release. As such, it was necessary to obtain the accounts by way of the disclosure of the board meeting which approved those accounts. Is this further evidence that Subex is trying to be tight-lipped about its restructuring, and how it might lead to further changes?
Those who watch Subex closely already knew about the change at the top of management; Surjeet Singh was replaced as CEO by Vinod Kumar, who had been COO since Subex’s early days. The minutes of the year end board meeting also state that CTO Ashwin Chalapathy has resigned, though this may only refer to his position as a Director of the company. Nevertheless, the problem with a little bit of transparency is that it can lead to much more speculation. The fall in Subex’s revenues, its change of CEO and the restructuring of the business are all good reasons to speculate about what Subex’s next moves will be. Subex will need to be even more transparent if we are to understand where they are headed.