There has been a flurry of news from Subex, the Indian RA giant, since they released version 5 of their ROC software. Within the string of positives and negatives, the themes remain largely unchanged from what we have long known about Subex. On one hand, Subex continues to announce new deals with customers. On the other hand, the overhang from their Foreign Currency Convertible Bonds (FCCBs) continues to plague them. Subex has successfully renegotiated their finances before, so there is reason for optimism. However, the context for analysing Subex’s performance has been altered by adverse news about some of their rivals. Recent months have seen the leaking of bad news about two Indian vendors, first Teleonto, then Connectiva. Whilst Subex is much larger and more mature, the saying ‘misery loves company’ might explain some of the rumours currently circulating the industry. Subex has taken on former Connectiva employees, but there are signs of a negative and twitchy mood spreading amongst industry insiders. In such an environment, loose talk about cashflow problems or potential takeovers can spread like wildfire, and Subex’s FCCB difficulties will inevitably fan the flames. But rumours are rumours and should not be repeated as fact. Here, then, is a brief summary of the recent Subex news.
Subex has made three sales announcements within the space of two weeks:
- An unnamed African group has acquired Subex’s fraud management solution;
- Avea, the Turkish mobile CSP, has bought Subex’s RA solution; and
- Both the RA and fraud solutions have been purchased by an unnamed Middle Eastern operator.
The exact value of the deals is unknown, but two of them are described as being ‘multi-million’. These press releases follow a familiar pattern from Subex, which has kept on announcing new contracts even whilst there has been a decline in similar announcements from some of its rivals.
The maturity of Subex’s existing FCCB’s were extended to July 9th; see here. Subex has faced strong headwinds from currency and stock markets, creating a double-whammy of a share price too low to justify the conversion of FCCBs into equity, and inadequate cash to redeem the FCCBs on their due date. Despite the sale of the former Syndesis division, and signs of resilient operating profits, Subex has needed extra time to negotiate a restructuring. Following the precedent negotiated in a 2009 debt-equity swap, the deal will likely see bondholders accept new shares in exchange for seeing their bonds sliced in value and their repayment postponed for another 3 to 5 years.
The Long View
Markets go up and down, and deals come and go. Now might be a good time to remember some wise words from the ‘sage of Omaha’, Warren Buffett:
Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
talkRA has always tried to look beyond the fads of fear and greed that have beset the revenue assurance industry. We have challenged the more extravagant estimates of the growth and value of the RA sector, including those that originated with Subex. talkRA first highlighted Subex’s FCCB risks all the way back in 2008. Now it feels like public over-optimism in the RA market is giving way to an excess of private pessimism. If Subex keeps making sales like it seems to be, and keeps on generating cash, as it seems to be, then the business is fundamentally sound and investors will continue to back it. What is happening is the substitution of a more long-term and realistic outlook in place of the rapid-return, high-risk style of investment which fuelled the rise of RA vendors. In the case of Subex, this will occur somewhat in public, as bondholders will give up on nominal but unrealizable promises in order to recoup more in the long run, and as the original equity holders see their share diluted. Other companies will and should go through a similar process to align expectations to what the market can actually deliver – though the realignment may not be so apparent. Realism is a good thing, even when it means lowering expectations. From the data available, Subex is a solid business which looks likely to generate worthwhile profits in future. Now is not the time for panic, and I anticipate that Subex’s bondholders will share that view.
But what about takeovers? Might Subex be the target for another firm? I doubt it, though it as always a possibility. After all, takeovers occur when the seller’s price matches the buyer’s offer, and nobody can rule out an unexpected or irrational offer. However, there are several factors that count against Subex becoming a target. For a start, Subex is too big to be easily digested by any of its peers. Buying Subex’s shares would also miss the point – the bondholders have effective control over Subex’s fate, at least for the immediate future. A much larger firm might see opportunities to enter into this specialized market, but the difficulties currently experienced by other RA vendors would likely discourage activity until the competitive landscape is clearer. Also, RA products continue to be too much of a niche play to yield obvious synergies for other software firms or for more network-oriented suppliers. There are likely to be easier and cheaper ways for a newbie firm to dabble in RA, or for a current player to grow market share. So I expect the next few years for Subex will look much like the last few: they will keep on grinding out ways to enhance profits, whilst remaining a big fish within RA’s small pond.