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