SUBEX SYSTEMS: Maximizing Revenues

The decade-old IT industry has gone through many upheavals with a number of IT companies having bitten dust. However, a few of them have not only survived, but are on a definite growth path. Bangalore-based Subex Systems in one such company, which successfully ventured into telecom products and is emerging as one of the fastest growing companies in the telecom software area.

Subex was formed in 1994 as a private limited company and converted into a limited company in 1996. The company started software development in 1998 and discontinued its hardware business after it went public in 1999 with the issue of 970,000 shares at a premium of Rs 65 a share. In early 2000, Subex raised Rs 24.81 crore by preferential placement of 330,800 shares of Rs 10 at a premium of Rs 740 a share to mutual funds and body corporates. The funds were utilized to acquire US-based telecom focused software services company IV Generation Inc., which provided turnkey project development services to leading US-based telecom companies such as AT&T, Lucent and ITDS. IV Generation has been converted into a wholly-owned subsidiary that focuses on software services and has been renamed Subex Technologies Inc.

Subex has clients across the world and is strengthening its marketing network using the recently received funding from strategic investors. The first of these placements was made to Toronto Dominion Bank, Canada, wherein Subex placed 213,770 shares of Rs 10 each at a premium of Rs 90 a share in early 2002. In April 2003, Subex allotted 1,570,245 Redeemable Optionally Convertible Cumulative Preference Shares (ROCCPS) of Rs 98 each to Intel Capital Corporation and UTI A/c
ITVUS.

Subex closed 2002-03 with consolidated revenues of Rs 70.01 crore and net profit of Rs 9.61 crore. Products contributed 28% to revenues and 51% to the operating profit in fiscal 2003.

The company is engaged in the development, integration and implementation of software products primarily used by telecom operators in the area of revenue management. It is one of the very few India-based software companies that has tasted success in the products category. Subex currently sells two revenue maximization products, namely Ranger and INCharge, which is a part of its RevMax suite.

Ranger is a fraud management product that was launched in 2000 and currently has the second-largest installed base globally.

Ranger is installed on 57 networks of 26 telecom services providers in 16 countries. Ranger, tailor made for the GSM environment, plugs various frauds by generating and analyzing data from switches, mediation devices, GGSN, routers, subscriber database and prepaid platform. Some of its notable clients for Ranger are Sprint, Global Crossing, Teleglobe and Americatel in North America; Connex, CYTA, Cosmoron and Armental in Europe; Sonatel, Econet, Ikatel, Cora and Spacefon in Africa; and Airtel, BPL Mobile, Idea Cellular, RPG Cellular, Escotel, Hutch, Spice, TAC, MTN, JTB and Spacefon in Asia.

Later, in 2001, it acquired Canada-based product company Magardi Inc. Magardi’s suite of revenue security products included OUTsmart, a real-time wireline fraud management system and INcharge, a billing verification system. The acquisition was made at $1.90 million in cash and 3% of shares of Subex. The products of Magardi were integrated with Subex’ products offering and are now marketed under the name RevMax, a suite of revenue maximization products.

At present, Subex has seven customers that ensure annuity revenues of $0.7 mn. The company now aims to take this number up to 20 over the next two years

INCharge, a revenue assurance system, plugs revenue leakages occurring due to unbilled subscriber usage, overpayment of interconnect charges and discrepancies between multiple operation support systems (OSS). The product was launched in early 2003. INCharge has been sold to three customers and Subex plans to cross-sell the product to its existing clients and also offers it along with Ranger.

In the services segment, Subex provides onsite consultancy services through its subsidiary Subex Technologies to US-based clients. The company specializes in systems integration and client server application development for industry verticals like telecom, e-commerce, pharma, finance and brokerage. Some of the company’s clients include AT&T, Telecordia, Lucent, CIT, Coopers & Lybrand, Warner Lambert, Merrill Lynch and Paine Webber.

Subex’ business model is built around the product wherein it sells the products to wireless clients and provides solutions around the product based on customer requirements. The company sells additional modules, upgrades and provides solutions around the product based on client needs from time to time. The company’s strategy is to increase the ticket size from each customer and this has paid dividends, as its current average revenue billing per customer has increased from $200,000 in 2002 to $500,000 in 2003. Subex currently has seven customers that ensure annuity revenues of $700,000 per year and the company is targeting 20 such clients over the next two years.

Subex’s current products are a part of the OSS for the telecom industry, which is growing at a rapid pace. The recent upheaval in the telecom sector saw a sharp decline in investments by telecom hardware manufacturers and service providers.

With increasing competition and need to control costs, the investments in OSS have remained robust and are expected to rise in future. According to recent estimates, global OSS sales are expected to increase from $15.2 billion in 2002 to $27.9 billion in 2007. Consequently, systems under OSS would see sustained growth over the next few years. Further, the advent of new technologies and migration to newer platforms such as 2.5G and 3G would also call for continuous investment in OSS. Subex sees the market for its products at $300 million per annum, which includes hardware and software components.

The company’s performance in the first quarter ended June 2003 was impressive with the share of product revenues improving over the previous quarter. The company reported consolidated revenues of Rs 19.14 crore, up 32% and net profit of Rs 3.21 crore, up 56% over the corresponding quarter of the previous year. Product revenues were up 37% to Rs 8.20 crore and formed 43% of revenues compared to 41% in the previous year. Subex’ high receivables are a cause for concern and debtors stood at 233 days of annual sales, indicating the long period required to collect sales receivables at the end of March 2003. The company feels that the situation is not alarming and the high receivables were due to the company launching the products during downturn in the telecom sector, and was forced to give liberal credit terms to clients. With the company having successfully deployed the product, it expects to improve the receivables position from existing and new customers.

Going ahead, Subex expects March 2004 revenues to grow by 14% and net profit to grow by 80% led by the growth in revenues and profitability from products, with product revenues expected to form 45% of total sales. The services segment is expected to grow at around 10% with operating margins of around 10%.

Subex currently trades at Rs 214, discounting our projected March 2004 EPS by 11 times and March 2005 EPS by eight times. The share price of Subex has been on a rise since the past quarter as the company issued shares to the strategic and financial investors. Subex was traded at Rs 90 during April 2003 and post first-quarter results for the period ended June 2003, the share price improved to Rs 160 and has further improved to the current level after the recent re-rating of most IT stocks. Subex is likely to post impressive results with its bottom line out growing the top line by a huge margin.

The company’s current product–Ranger–is now well established and likely to ensure sustained growth in the near future.

With additional revenues from some new launches, Subex is likely to see revenue growth continuing over the medium term. Notwithstanding the recent jump in the share price, a robust second quarter performance would keep Subex’ share price firm. Hold 

Sushanto Mitra is the founder of
Technology Capital Partners