For a second time, Subex has cut a deal to restructure its financing. Subex’s problems have stemmed from using convertible bonds denominated in US dollars to finance its 2007 purchase of Canadian firm Syndesis. With the share price too low for investors to convert their debt to equity, and the Indian rupee continuing to slide against the US dollar, Subex first bought itself extra time to restructure its old 2% FCCBs, and has now completed an exchange by issuing new FCCBs worth USD131M, at 5.7% and falling due in July 2017. The bond’s floor price of INR22.79 is about 1% below the current share price.
Subash Menon, founder and CEO, sounded a defiant note when he said last month:
The increasing uptake for our industry-changing Revenue Operations Center and Managed Services offering and the non-linearity in the business are clear indicators that we are here to stay
However, the deal has come at some cost to him personally. According to a stock exchange filing, both Menon and Sudeesh Yezhuvath, COO, will lose their ‘golden goodbye’ entitlements in the event of leaving the company. Menon will now step down as Chairman, whilst retaining his other roles. It is not clear who will fill the Chairman’s role.
Subex announced modestly positive results for the financial year ending 31 March 2012. Net profit before exceptionals was up 7.6% on the previous year. Annual product income was slightly up, and represented 90% of revenues. However, this was offset by a fall in revenues from services. Exceptionals deducted USD11M from the bottom line, most of that relating to forex movements, though also including redundancy costs of USD1.2M. Profit after exceptionals was USD7M, down on last year.
The business is fundamentally sound, and it remains in a stable orbit where revenues are roughly in the band of USD100M. This is below the company’s peak but reflects the fact that Subex retains a consistent and solid share of a stable market. The growth potential is significantly lower than the more optimistic market projections that abounded during Subex’s strong growth phase. Unless management can find an unexpected ‘breakout’ offering, they will likely remain under pressure to keep costs low and grind out improved returns in future. Given difficulties faced by rival vendors, Subex may opt to play a waiting game. A realistic strategy would see Subex steadily consolidating its market position by picking up customers from weaker competitors that have an unsustainably low market share or more volatile income streams.