Subex Systems is a telecom software product company offering services to telcos globally. The Bangalore-based company is the second largest fraud management system vendor in the world, in terms of number of installations.
It announced its March quarter results wherein its revenues grew 27 per cent to Rs 89.13 crore compared to the year ended March 31, 2003. The company's profit after tax grew 78 per cent to Rs 17.75 crore, after taking into account foreign exchange translation losses of Rs 2.56 crore.
Subex's products business grew 60 per cent in the period, accounting for nearly 45 per cent of revenues. Subash Menon, chief executive, talks about the company's prospects.
How has Subex benefited from the recent upheaval in the telecom sector? What are your growth projections from the vertical going forward?
The upheaval in the telecom sector has forced telcos to focus on the bottomline while improving their revenues. The latest approach is to monitor average margin per user (AMPU) along with average revenue per user (ARPU).
This metamorphosis has ushered in the era of revenue maximisation. Today, carriers across the world are exploring means to plug revenue leakages in their networks while improving the topline.
This has resulted in a huge demand for revenue maximisation solutions like fraud management system and revenue assurance system, the area in which Subex specialises.
Subex is positioned to gain from the investments that are being made by carriers in these solutions. The telecom industry will witness a more steady and sustainable growth. We will benefit from this and our product revenue will grow at 35 to 40 per cent CAGR and profits will grow faster.
What is the optimum mix that the company would like to have between products and services (as a percentage of revenues)?
We would like to have about 80 per cent of our revenues from products and 20 per cent from services.
We are focused on the products business and expect that part of the business to grow faster than the services business in the coming years, as has been evidenced by the performance in the past three-four years.
Tell us about your RevMax platform and its expected contribution in future growth.
RevMax offers telecom operators an integrated platform for revenue maximisation that eliminates the need to invest piecemeal in point solutions.
Benefits of an integrated architecture are strategic and operational. Strategically, a single platform optimises the IT infrastructure costs and drives informed, holistic business decisions and course corrections.
Operational benefits include streamlined, standards-driven end-to-end revenue maximisation workflow, enabling carriers to leverage data available across the organisation.
What is the quantum of orders in the pipeline in fraud management and revenue assurance areas?
About $27 million from all the geographies we operate in.
Tell us about your clients.
Our global clientele include AmericaTel, Global Crossing, Sprint and Teleglobe in North America; Sonatel Mobiles, Sonatel Wireline, Cora, Ikatel and Econet Wireless in Africa; Cyprus Telecommunications Authority (CYTA), Cosmorom and MobiFon (Connex) in Europe; Investcom in Middle-East and Africa; Bharti Mobiles, BPL Mobile, Escotel, Hutch, Idea Cellular, Tata Teleservices, DTAC Thailand, JTB Brunei and MTN Sri Lanka in Asia Pacific. There is absolutely no client concentration risk in the products business.
However, in the services business, we have that risk as about 80 per cent of the revenues come from AT&T.
How are revenue projections across geographies? Are there any plans to cut down exposure in the US?
We expect 25 per cent from EMEA, 13 per cent from Asia and 62 per cent from the Americas.
The share of Americas is high because all the services revenues come from the US. If we exclude services revenues, the split for the products business will be 50 per cent, 25 per cent and 25 per cent respectively.
How much do you plan to invest in sales and marketing activities in FY05 in India and other geographies?
We intend to invest about $3 million across the world. We have increased our sales and marketing budget 50 per cent in FY05.
How is the margins position of the company? What is the trend going forward?
In the products business, we have an EBITDA of 50 per cent. We expect this to increase to about 60 per cent in the next two-three years. The EBITDA in the services business is 12 per cent and we expect to hold onto this in the future.
How big a threat is rupee appreciation for the company?
Given that about 95 per cent of our revenue is dollar-denominated, rupee appreciation is a significant aspect. We take forward cover to protect translation losses.
What is the company's view on billing rates going forward?
Billing rates are not of any consequence in our products business as we license our solutions. In the services business, billing rates have stabilised.
Does the company have plan any significant capex plans in the near future?
As we are focused on the products business, our capex requirements are minimal.
What is your view on the valuations front? What is the forecast going forward?
Subex has very strong fundamentals. Our focus on telecom software products makes us unique in the Indian context.
Starting from a zero base about four years ago (Ranger, our first product, was launched in February 2000), we today have the second-largest installed base globally for fraud management systems. Our second product (INcharge) has gained substantial traction in the past 12 to 14 months.
We intend to launch a third product by the end of 2004 and that should cement our position in the industry. Based on fundamentals, Subex is a stock with a compelling value proposition.
