The Rewards of 'Risk'

While 3i Infotech has announced the launch of its Foreign
Currency Convertible Bonds (FCCB) of $50 mn, another yeoman of the minuscule
software product company tribe has closed in on another acquisition as a direct
result of its GDR issue. Cashing in on its $10 mn GDR kitty, and right into the
fourth acquisition, Subex Systems chairman, president, and CEO, Subhash Menon
shelled out a mere $2 mn in March to acquire the fraud management business
assets of US-based Mantas.

Though small by any standards, for Subex the acquisition
marks a sea change in customer complexion and product directions. Menon expects
revenues from the Mantas division acquisition alone to bring in $2 mn by next
year. He justified the latest step in his acquisition biz to the expected
reasons-accretive revenues of at least $600,000 by next year and enhancement
of shareholder value. “Subex will now be able to tap more Tier 1 telcos in the
US. They can be leveraged to cross-sell and gain more business.”

The 300-employee strong Subex has for some time been
finetuning its process of expanding and improving its product offerings in the
telecom fraud management and revenue assurance spaces by strategic acquisitions
of product company divisions. In a niche market worth just $250 mn worldwide
where Subex is pitted primarily against HP, Menon is hedging his bets on faster
customer acquisition through strategic niche player purchases. And, on the
growing opportunities in the larger revenue assurance and maximization market,
which research firm Gartner pegs as an $800 mn market.

Given the fact that the top 20 telcos globally have a
combined revenue of $1 tn, telecom fraud alone translates to 4% of revenues,
amounting to $40 bn. In-house solutions, which currently dominate in 60% of
telcos, have obviously not been fully effective. Besides, with an estimated 35%
of telcos currently using a fraud management solution and just 8% using a
revenue assurance solution, these are strong addressable markets for Subex in
the next ten years.

The company is on target to touch $100 mn in revenues from
products alone by 2013 from $23 mn this year, says Menon. “We do believe in
leading consolidation efforts in this space,” he says, noting that the
competition-especially, HP and Ectel-is also equally 'profitable' in the
fraud management space.

INDEFATIGABLE: Subex Systems' chairman & CEO, Subhash Menon

Wireline Goals

But herein also lies the need to diversify into more scalable revenue
streams such as banking, mortgage and insurance products, say industry watchers.
They feel that Subex has the scale and domain expertise to offer multiple and
consolidated service offerings across the BFSI manoply. Menon, however,
disagrees: “That would be making unnecessary noise when we are doing well with
our niche expertise and knowledge gathered down the years. Entering the banking
or insurance sector wouldn't be a good idea.”

Subex's rollcall of global clientele includes wireless
service providers such as AmericaTel, Hutch, Sprint, Teleglobe, Tiscali, BPL
Mobile, Airtel, Porta, Vesper, Western Wireless, Vodafone, BellSouth, and
T-Mobile. Now, for the first time in over 14 years of its existence, Subex is
pitching its dice higher to soar beyond a traditional wireless customer base and
tap the big wireline customers in North America.

The newly acquired Mantas division will drive the change in
keeping with Subex's client complexion now veering towards a wireline customer
base.

AT&T and Verizon, who have gone through sapping cycles
of M&A talks in recent months, are set to become the largest telecom
companies in the US, and will also become Subex customers, says Menon. “These
top tier wireline companies alone can help double our fraud management and
revenue assurance takings,” exulted Menon, noting that his strategy of seeking
suitable acquisition targets in North America and Europe was already paying off
well for Subex.

In a niche area of telecom revenue maximization via secure
authentication and compliance procedures, Subex has built a global presence
across North America, Europe, and Asia. Ranger, its market-leading fraud
management product, has been fetching the company at least 70% of its revenues
over the last three years. This, combined with the newly released ONtrack
subscriber risk management solution, has helped the product company acquire over
80 customers worldwide.

Menon believes that the telecom revenue maximization and
revenue assurance solutions, which the company has been offering for about three
years, will bring in a bigger share of the revenues in fiscal 2006. The
39-year-old CEO and his team are now all geared to push ahead with ONtrack,
Incharge, the company's revenue assurance solution, and OUTsmart, a wireline
fraud management system, with the big US wireline customers. Subex had acquired
the IPRs for Incharge and OUTsmart from Canadian company Magardi in 2001.

Buy it Niche

Menon has for long believed in the need for acquisitions to spur inorganic
growth and reduce time-to-market. From the days of Subex shareholders writing
off his acquisition expenses for product IPRs, Menon is poised to see his
strategy of acquiring partial stakeholdings in key strategic divisions of target
companies helping Subex deepen its core expertise and also offer finished
products without going through successive cycles of development and associated
costs.

In its current inorganic growth phase, even an apparently
piecemeal acquisition such as the Mantas fraud management activity is critical
for a growing product company, which needs to access a wider range of clientele
with some ready products. Menon does not fail to mention that his earlier
acquisitions of the Alcatel Fraud Management Group, IVth Generation, and the
Centurion fraud management solution from Lightbridge have started yielding
returns for Subex, which now holds the world's largest installed base for
fraud management systems.

After aggressively targeting emerging markets such as Latin
America, West Asia, and China over the last two years, Subex is still scratching
the surface of a potential multi-billion dollar market for revenue assurance and
fraud management solutions. But the company is glueing its feet into the right
niches by picking up the most promising product divisions in the right stage of
maturity.

Hereon, Subex will have to outpace the competiton by
maintaining its average deal size consistently above the $1.5 mn mark. Menon's
$100 mn product dream would not need a more robust launchpad than sheer
consistency-Subex's best assurance against 'risk'.

Ravi Menon

ravim@cybermedia.co.in