Research analysts Frost & Sullivan recently reiterated that WeDo Technologies continues to be the market share leader for RAFM, but what do we really know about WeDo’s performance, and what does it tell us about the market as a whole? Determining the direction of the largest vendor of revenue assurance and fraud management is vital to appraising the future of the market.
Estimating WeDo’s revenues is difficult, because the Portuguese vendor is a subsidiary of the much larger Sonae Group. As a consequence, WeDo does not publish audited accounts, unlike its chief competitor, Subex. There is not a single mention of WeDo in Sonae Group’s annual report. The closest we can get to public figures for WeDo is to look at its immediate parent, Sonae IM, the division which describes itself as Sonae Group’s “IT tech investment arm”. Sonae IM’s 2017 revenues were EUR126mn (USD143mn), and it generated revenues of EUR112mn (USD127mn) for the first 9 months of 2018. So how much of these figures comes from WeDo, and how much from the other ventures owned by Sonae IM?
We know that Frost & Sullivan considers WeDo to be the RAFM market leader, and we also know the revenues of their chief rival, Subex. This provides a good basis for estimating the lower bound of WeDo’s revenues. Subex generates approximately USD50mn in sales, though some might argue that a sizable portion comes from business lines which fall outside of RAFM.
It is also reasonable to make some assumptions about the rational behavior of businessmen, and one of those assumptions is that businessmen talk more about their business’ performance when times are good and they are enjoying growth. WeDo is not obliged to publish accounts, but sometimes its executives do give advice about their annual revenues. After enjoying positive growth during 2013, WeDo announced it had revenues of EUR61.5mn. WeDo has not made similar announcements since, and some reduction in their revenues can reasonably be inferred from the subsequent streamlining of various product and service lines that contributed to the FY13 number. So if we make some allowance for inflation, WeDo’s revenues could potentially have grown to around EUR65mn (USD74mn) without anyone feeling that the news was good enough to share.
That leads me to guesstimate that WeDo’s annual revenues are somewhere around EUR60mn or USD70mn, give or take 10 million. This would mean that WeDo represents about half of the total revenues of Sonae IM. That might seem high, given that Sonae IM has stakes in more than a dozen businesses, but only a few of them are wholly owned by Sonae IM. The ratio is also roughly consistent with reports of the number of WeDo employees compared to Sonae IM’s total workforce. For Sonae IM, WeDo appears to represent a relatively large and mature business, providing a counterweight to the smaller but riskier investments in their portfolio.
Turning to profitability, this is even harder to assess for WeDo. Sonae IM basically makes no profit. They reported “underlying” EBITDA of EUR4mn for the first 9 months of 2018, whilst the reported EBIT figure for 2017 was negative. Perhaps WeDo is an essentially profitable business whose contribution is offsetting the losses incurred by other Sonae IM ventures. But if that is so, Sonae’s management must be choosing not to trumpet that profitability. The FY13 announcement claimed WeDo’s EBITDA was EUR12mn that year. This leads me to guess that WeDo may continue to generate a positive EBITDA similar to that enjoyed in 2013, boosting the overall figures for Sonae IM, but that WeDo is no better than borderline profitable when all costs are taken into consideration.
This is as far as we can get with the numbers that have put into the public domain. However, we can also learn a lot from the nature and tone of the words that businesspeople use. Although WeDo represents half of Sonae IM, it does not receive more attention than the other Sonae IM investments. On the contrary, Sonae IM is actively talking up some of its other ventures. Combing through the reports shows that Sonae’s key recurring message is they will generate growth from cybersecurity. Consider the following statements from Sonae Group’s 2017 management report:
In 2017, Sonae IM was very active in acquiring strategic positions, mainly in the cybersecurity space and innovative retail driven companies.
In the retail and telecommunications technology businesses, Sonae IM added value to its portfolio, strengthened its leadership position in the Iberian cybersecurity market and positioned itself as a preferred partner for technology companies with highly innovative projects.
Sonae IM will keep investing in cybersecurity as well as in tech based companies related with retail and telco.
These words have been backed with money. Sonae IM bought into a string of cybersecurity firms during 2017 and 2018. Meanwhile, none of Sonae’s reports have anything to say about WeDo or the RAFM market it serves.
There is no doubt that the top management of Sonae Group knows about WeDo and what it does. The former CEO of Sonae IM, Cláudia Azevedo, was promoted to CEO of the whole group in July 2018. She has been a regular participant in WeDo User Group events in Portugal. Cláudia Azevedo’s father was Belmiro de Azevedo, a billionaire who ran Sonae Group for 40 years, whilst her brother Paulo is the current Chairman of the group. But despite the awareness of WeDo at the highest echelons of Sonae, there is no sign that new Sonae IM CEO Eduardo Piedade is trying to raise the profile of the largest business in his division. Security is the central topic for half of Sonae IM’s frequent announcements, whilst WeDo received only one mention this year.
The Sonae IM team clearly knows a lot about the telecoms RAFM market. They own the largest firm in the segment. WeDo CEO Rui Paiva is an Executive Director of Sonae IM. Paiva may also be the longest-serving CEO of any RAFM vendor, having occupied that role since co-founding WeDo in 2001. Though they know about RAFM, all the indications are that Sonae IM expects growth to occur elsewhere. They are investing heavily in cybersecurity. And earlier this year Paiva launched a new business, Skorr, aimed at social media users.
Previously WeDo sought to grow the market for RAFM by expanding the range of products and services that it described as ‘enterprise business assurance’. Assurance products were also targeted at other industries like retail, utilities and healthcare. WeDo has since reversed that strategy. Instead of trying to grow the RAFM market overall, WeDo now concentrates on taking a larger share of the market, by supplanting its rivals. This is evident by the heavy shift towards promoting sales of fraud management systems, an area where WeDo historically lagged behind chief rivals Subex. WeDo’s revised strategy is perfectly rational, but obviously a lot less ambitious.
In seeking to draw inferences for the entire RAFM market, perhaps the most worrying statistic from Frost & Sullivan’s research is that WeDo needs only 15 percent of the RAFM market to be its leader. This share is little changed from previous years. If WeDo’s revenues are not increasing, and its share is not improving either, then the new strategic direction is not working, because it has failed to deliver any growth. A 15 percent share means WeDo has considerable opportunity to increase the revenue it generates from a market worth around USD450mn in total. WeDo’s operating costs are not correlated to their revenues, so this also gives them plenty of opportunity to generate profit. However, there is another possible interpretation of the data which would suggest WeDo has achieved plenty of success, but that the outlook for the market is more pessimistic than analysts like Frost & Sullivan appreciate.
Anyone who speaks to the WeDo management team would have the impression that anti-fraud sales are increasing. But it cannot be the case that some products are enjoying growth whilst total revenues and market share remains unchanged, unless the business is experiencing an equal and opposite decline in sales of other products. Though I have no relevant data, I do not believe that WeDo is losing RA customers, offsetting a rise in FMS sales, because the industry trend should be towards telcos consolidating costs by purchasing both systems from the same supplier. Another way to explain the apparent contradictions would be to question the reliability of Frost & Sullivan’s claim that WeDo has a 15 percent share of the RAFM market. WeDo could make new FMS sales to new telco customers without being able to translate this into higher total revenues if all prices are being squeezed. But there is no reason to believe the market leader is more subject to price erosion than any other vendor. And that means that WeDo may actually be obtaining a rising share of a systematically declining market, with the result that its revenues and profitability remain largely unchanged.
Obviously this is a much gloomier projection for the RAFM market. It is not the sort of forecast that any businessman would want to draw attention to. But it would explain why WeDo’s strategy of poaching sales from competitors can be successful in practice without generating the kind of growth that would excite the management team at Sonae IM. If WeDo only has 15 percent of the global RAFM market, then they can generate healthy future profits by grabbing a large chunk of the other 85 percent. But if WeDo has already obtained a much larger share, then the prospects for growth are correspondingly weaker.
This is speculation, but it is possible to formulate a logic for why Frost & Sullivan and other analysts would significantly overestimate the size of the RAFM market. Businessmen talk up the market in which they operate, they do not talk it down. They tend to overstate revenues, not understate them. So if there are too many competitors chasing RAFM revenues, there is a chance that systematic bias has significantly inflated the estimate of the whole market. This analysis already touched on one way that revenues can be exaggerated; Subex publishes audited accounts, but we can overestimate the extent of their RAFM revenues by failing to discount revenues for other kinds of products. It is even easier to exaggerate RAFM revenues for vendors that do not put audited numbers in the public domain.
There comes a point when the analysis must stop because there is no more data to analyze. The irony is that RAFM is a discipline that uses a lot of data but yields relatively little. We could do what analysts like Fraud & Sullivan do: speak to a lot of businesses, and trust what they say is true. As a former auditor, I know how hard it is to ensure a company is not manipulating its numbers, even when subjected to thorough and independent scrutiny. It would be naive to expect the same level of impartiality from a firm selling market research reports that cost USD15,000 to businesses contemplating multi-million dollar investments. What we can observe is the differences in what people said at different times, and the differences between what they say and what they do. The owners of WeDo possess the largest, most successful RAFM business in the world. But all their talk and money is directed elsewhere, and especially towards cybersecurity. My hunch is that they know more about the RAFM market than anyone else, and that is why they no longer behave like the RAFM market will grow.