Indian revenue assurance software business Subex has announced a net loss of US$17m for the financial year ending 31st March 2008. Subex’s boss, Subash Menon, described it as a “disastrous year”. Whilst revenues have grown rapidly as a result of acquisitions, costs have also grown sharply. Subex registered operating losses in the first, second and fourth quarter of FY08, and registered only a modest operating profit in Q3. The business gave the following reasons for its poor performance over the year:
- Postponement of an order worth US$20m;
- Issues with execution resulting in lower revenue recognition in continuing business;
- Lower growth in order intake due to challenges with integration; and
- A fixed cost base minimal variability.
The business announced it had realized by Q4 the cost savings it had anticipated following the acquisition of Syndesis, the service activation outfit. Subex anticipated this would translate into annualized savings of US$12m. This in part was used to justify a forecast for FY09 of revenues up slightly at US$125m, and profits after tax of US$12m. Subex also expected to be cashflow positive in FY09. You can see the headline announcement here and the results presentation here.
The results from Subex are a disappointment, and Subex had better be wary of giving investors the impression that their forecasts cannot be relied upon. Revenues for FY08 totaled US$121m, well short of the original forecast of US$150 and still short of the revised forecast of US$130m they gave half way through the year. Subex originally forecasted profits after tax of US$38m for the year, and was still forecasting a US$26m profit after tax in its reforecast. This means actual profits were a full $55m worse than forecast at the outset of the year, and US$43m lower than predicted just over six months ago. You can read my blog about the reasons why Subex cut their forecasts here. Obviously their reforecasting exercise was not pessimistic enough. Badly failing to meet revenue and profit guidance in FY08 will greatly increase the pressure on Subex to deliver on their FY09 forecasts.
Hot on the heels of the publication of these results comes more bad news for Subex. It has been reported that economic events have increased the foreign exchange risk for the US$180m Subex has raised from Foreign Currency Convertible Bonds (FCCBs) which are due for redemption in 2012. See the story here.
The news is bad from Subex, but their predictions remain bullish for growth and a return to profitability next year. Much of this must be premised on the idea that the dead wood has been removed from the business following the integration of acquisitions Azure and Syndesis, and that they will return their focus to gaining new orders and improving efficiency. The firm did not take the easy option of blaming its results on a downturn in the market. Subex instead insisted that there was underlying growth in the market, and that they expected this to continue next year. The failures in FY08 had reflected Subex’s own problems and was not a sign of overall market weakness. Subex stated it believes the global telco software market is growing at between 10% to 12% annually. The plan from Subex hence remains the same: be big because telcos will increasingly want to focus on fewer, bigger, suppliers. Subash Menon explained his outlook:
Telcos will look for significant partners and would like to move away from smaller players
Subex are setting out their stall. The market for their products continues to grow, and Subex intends to stay big and to take a big slice of the market. To cover their cost base, they need to generate US$125 of revenues to give a good positive return. They have little room for failure. With investor confidence knocked they need to deliver next year. They also need a good positive run in following years if they intend to refinance their FCCBs in 2012. Subex is betting that their strategy is right. They plan to be a big player in the revenue assurance, fraud management and service activation software business, and expect smaller players to fall away as competitors over time. The strategy sounds right, the challenge will be in execution.