Subex, the Indian business assurance vendor, has released their results for the financial year ending 31st March 2014. The topline news is good: sales are up 10.6% to INR3.4bn (USD58mn). Operating expenditures are down. Employee and subcontractor costs were cut again, reduced by 13% to INR1.79bn (USD30.5mn). As a consequence, EBITDA was up 77.7% year-on-year, after stripping out INR168mn (USD2.9mn) of forex losses as the US dollar strengthened against the Indian rupee.
From the data available, Subex’s revenue streams appear to be pretty well balanced. Managed services now generate 27% of revenues, whilst 40% comes from implementation and licences, and 33% from support. In short, customers want Subex’s products and services, and they can be delivered at a cost which leaves a viable operating margin. I calculate EBITDA margin to be 24.9%, excluding forex losses but including the INR22mn (USD375K) bad debt provision that had been classified as exceptional in the accounts.
That, put simply, is the good news from Subex. The bad news is that this Indian ox continues to pull a heavy load. In the past, Subex’s profits were magnified by its investors’ appetite for risk, resulting in rapid growth through acquisition. Now the investors are slowly grinding out returns in exchange for their continuing stake in the business. Subex’s operating surplus was cancelled out by INR675mn (USD12mn) of finance costs, up 30% since FY13. After tax, Subex made a loss of INR116mn (USD2mn) for the year.
Subex is a fundamentally sound business. Though it lacks glamour and is weighed down, this ox is a strong animal. It is a useful beast of burden; its owners will want to keep it in healthy condition. Ignoring the possibility of disruptive technologies upsetting the market, I expect that telco business assurance is evolving towards a duopoly where the global brands and presence of WeDo and Subex will give them efficiencies in sales, marketing, cost and research that steadily wear down their mid-size rivals. The top two firms will increasingly dominate sales to large network operators, whilst much smaller agile players succeed at the opposite end of the spectrum by pitching low cost solutions to an expanding number of virtual networks. This will leave the mid-sized vendors uncomfortably squeezed on both sides, and most in need of finding a distinctive strategic path that goes beyond mimicking the suite of offerings pushed by the big two.
They say you should invest in what you know, but the truth is that I would not invest in telco business assurance. The irony is that business assurance promises rapid returns for any telco that aggressively tackles leakage and fraud, but the vendors who sell business assurance solutions only tend to receive a small fraction of that benefit. There is no contradiction here: the value of a product as perceived by a customer need not match the real value generated for the customer by that product. Business assurance continues to be a difficult sales proposition, and even though telco customers are far more educated than before, they are spoiled by having too many suppliers to choose from. But whilst I would not invest in business assurance, that does not mean investors should look to cut and run. On the contrary, now that they have taken a stake, they should hunker down and play the long game. Telcos make mistakes that cost money. They made mistakes ten years ago, and they will make mistakes ten years from now. Subex satisfies a need that is not going to go away. And with some imagination, they may be able to educate markets to see the value in addressing other kinds of mistakes that went unnoticed before, such as sub-optimal capital expenditure on network assets. Subex is not the kind of business that will rocket-charge any investor’s portfolio, but the right choice is to stick with this Indian ox. It has the strength to keep moving reliably forward.