Subex Limited Fourth Quarter and Annual Earnings Conference Call Financial Year 2009 May 26, 2009 Good evening ladies and gentlemen. I am Prasad, the moderator for this conference. Welcome to the Subex Limited conference call. For the duration of the presentation, all participants lines will be in the listen-only mode. I will be standing by for the question and answer session. I would like to hand over to Mr. Subash Menon. Thank you and over to you sir. Hello and good evening to everybody. Welcome once again to this results call presentation of Subex. As is our practice, I will take you through the presentation, which hopefully you would have received the email by now or it is on our website or in case you don t have it in front of you, there is nothing to worry. I will be reading out all the contents of each slide. So, after that so, there is no issue on that front and after that is over, we will throw the floor open for questions. With that, I move to the first slide which is product business expenses. As you can see there, we had a total expense of 1,171 million rupees in the fourth quarter. This is slightly higher than the third quarter. However, what is pertinent is that we had made a bad debt provision of 50 million rupees in the third quarter and 145.5 million rupees in the fourth quarter. Now, if one were to exclude these provisioning this provisioning, then you would see that costs have steadily come down from Q1 to Q2 to Q3 to Q4 and there has been a significant cost reduction from the last year to this year. The reason why we provided for these bad debts, we have not written off anything. We have just provided just to be prudent and pretty much everything beyond 180 days, all those debts have been all those ARs have been provided for at this point in time. This is only a prudent measure. We are not expecting any, you know, significant write-offs from this and as and when we collect against these, we will, of course, reverse those provisions. So, that is the first slide. As is clearly seen, the expenses have come down quite significantly. So, but for these provisions which add up to roughly 191 million, sorry, 195 million rupees, roughly 200 million rupees, if one were to exclude that, you are talking about 4,190 million of expenses vis-à-vis 4,756 million of expenses, so that is a significant reduction in expenses that we have seen in this current year. Moving to the next slide which is operating income, operating profit, here, I have excluded other income because, you know, other income is extremely large. If you look at the current year other income, you would see almost 370 million rupees of other income that we have recorded on the products side and another 70 odd million which we recorded on the service side, adding up
to about 450 million roughly rupees of other income. Now, if one were to take that other income, you would see a significant profit, but, however, as this other income has not come from operations and they essentially came out of restatement of, you know, it is forex related, I mean, restatement of certain liabilities and assets, you know, and they move to the P&L line. This is essentially from inter-company transactions. We decided to, you know, in my calculation, I am kind of excluding that because it is not from operations. So, if you look at things from an operating standpoint which is profit before depreciation, amortization, and tax excluding the exceptional excluding this other income and excluding exceptional items, you would see that in the last financial year, there was a loss of 1,138 million rupees whereas in the current financial year, we have exactly broken even. As against the revenue of 4,385 million rupees, expenses also turned out to be 4,385 million rupees. Now, this is a significant swing. We are seeing a swing of almost 114 crore rupees, that is 1138 million rupees, that sort of swing we are seeing in the operating profit. Now, as you can see, a lot of this is because of expenses reduction and some of it is because of revenue increase. So, it has been kind of, you know, 40% odd coming from the revenue increase and the rest coming from expenses reduction. Moving to the next slide, this is EBITDA for the products business. As usual, we are focused on the products business. Last year, we had a negative EBITDA of 22% whereas this year, that has swung to 10% positive EBITDA. So, that is a swing of 32%. This is exactly what we witnessed in the earlier slide, the operational profit slide. So, all these things go to prove that the business has certainly turned around. We have had, you know, FY08 was the worst year in the history of Subex and FY09 operationally we have made a profit. When you look at the books, of course, you would still see a loss because of the exceptional items which is quite significant, but instead of taking advantage of the amendments to AS-11, we decided to take the entire pain in one year without spreading the pain over the next few years. So, the FCCB restatement has been done at 50 rupees and some paisa, I think it is 50.72 or something like that or maybe 50.42, I don t I can t quite remember the exact number, but 50 plus, so that restatement has happened at that rate and now when the rupee appreciates, we will actually get the gain, but anyway that was not the idea. The idea was to take all the impact in one particular year and to spread the pain. So, clearly the company has turned around. That is something that we would like to reiterate at this point in time. Moving to the next slide which is the products revenue by stream, license revenue is roughly of the order of about 56-57%, support is thereabout, it is about 25% the average number, managed service has moved up a little bit to about 11%, and then customization and third party. So, clearly license is still chugging
along very well. So, that shows that we are nowhere near saturation in our business. There are still much more license revenues to be earned and at the same time, support is quite steady, even at the higher revenue base and which means support in absolute terms has grown over the past few years and managed services also has grown quite nicely. As you know, we have got a lot of emphasis, a lot of focus on managed services because that is a very, very lucrative area and that is also the way the world is moving. So, this shows a significant focus on that and hopefully significant returns from that as well going forward. Looking at the product revenue by geography, EMEA continues to be the best region for us. It brought in almost 55% of revenue while Americas brought in 37%. So, Americas kind of stayed where it was last year. A-Pac fell, so the gain of A-Pac sorry, the gain of EMEA has been the loss of A-Pac in that sense. In absolute terms, of course, everybody did better, but in relative terms, EMEA, Europe, Middle East, Africa continues to be the best region for us and that you have seen in the last financial year as well. Moving to the next slide which is order intake, now, here we have we did not have positive news. There has been a bit of a negative trend if I might say, I mean, though I wouldn t like to call it a trend because I think this will reverse shortly, but what you see is that revenue, I mean, order intake fell in the current quarter, in the last quarter quite significantly. We were running at an average of about 21 million dollars per quarter of order intake. This fell to 5.4 million dollars in the fourth quarter. This, I think is reflective of what is happening in the economy out there, but interestingly enough, we did not lose any orders. So, the opportunity was there, the potential orders were there. We did not lose any. We won just a few. We didn t win very large number and this is simply because all contracts are taking much longer to be closed. Customers are I think the sale cycle has lengthened quite significantly and the customers are going through multiple levels of divergence before contracts are placed. This had a significant impact on our order intake in quarter four and that is why order intake came down from an average of 21 million dollars a quarter to one-fourth of that, 5.4 million dollars a quarter. The result is that in the year, our order intake came down to 68.9, roughly 69 million dollars as against 86 million dollars the year before. So, on the order intake front, definitely the show has not been good. Moving to the other metrics, you would see that DSO has come down quite significantly. We are now it was 111 days last year, which has now come down to a mere 41 days. So, once we invoice, collection is not an issue. Our current qualified pipeline is at 360 million dollars. So, pipeline continues to be strong and this is exactly what I meant by we haven t lost anything much. While we have not won, we did not win a lot in last quarter, in quarter
four, we did not lose either. So, pipeline continues to be strong and that gives us confidence that our expected order intake in the coming quarters will indeed happen. The share of product revenue in total revenue, that continued its move up and that is now at 79%. So, we expect that it can move up further in the coming years, so this is tracking exactly in line with our expectation and product revenue becoming a significant stream as compared to services revenue on the whole. So, from a general perspective, what has been happening in the business is that, the pipeline is strong, people still want to buy the products, there are still contracts coming out, you know, from all the different operators out there. That is very, very clear. We have while at the same time, the sale cycle has lengthened. This means it takes much longer to close a contract than it was taking earlier. Our win rate has actually improved during this period and that is because in bad times, as we can see, many customers want to depend on established players and leaders like us and not go to smaller players. So, our win rate has improved. However, unfortunately, I think the time taken to win is longer. On an annual basis, with limited period accounting, the kind of order intake has dropped. We believe that this will sustain. This will, you know, stay like that for some more time where people will take time to place orders. However, we expect to see an improvement during the current financial year, FY10 itself. On the profitability front, the company has, you know, definitely turned around. We have operationally, we got into a profit scenario from a significant loss scenario. So, if you were to look at the entire year and look at profit after tax excluding the exceptional items, you would see that this number has swung from negative 128 crores for last year to positive 15 crores for this year. So, that is once again a significant swing of about 143 crores in the year, a good amount of that was contributed by reduction in cost and fairly large amount by order and a higher revenue coming in the year. So, revenue is trending up reasonably well. We expect that to do better in the coming quarters. Costs have come down quite significantly, but this doesn t mean that we are not at it any longer. We continue to be at it and we will continue to make the operations more and more efficient. That is the whole idea. So, on the whole, the business has turned around. There is improvement in the business. The only negative news out there is the fact that order intake in quarter four was well below par and we expect that to change with time. Hopefully, that is what I will be able to tell you in the coming quarters, but that is something that we need to be on the lookout for to ensure that that indeed happens and as regards the backlog for the current year, we started with after all these things, we started with a backlog of 56 million dollars for the current year and we are not giving a guidance for this year. So, all I can tell you is that we are sitting with a pipeline of 360 million dollars, we are looking at a pretty decent conversion out of that into order intake and then into
revenue and we have started off with 56 million dollars in the bag to be executed during the year. That is the backlog for the year, for the whole year. We do have some additional backlog for the coming years, but then we do not quite declare that. We are just focused, when it comes to backlog, you know, with declaration, we are just focused on the current year. So, 56 million is what we have in the bag at this point in time for execution in the current year and the rest will have to be, we will have to book orders, then convert them into revenues and thereby increase the revenue to whatever number that we are trying to get to. With that, I am done with the presentation. Once again, thank you very much and I would like to now throw the floor open for questions. Thank you very much sir. We will now begin with the Q&A interactive session. Participants who wish to ask questions, please press *1 on your telephone keypad. On pressing *1, participants will get a chance to present their questions on a firstin-line basis. Participants are requested to use only handsets while asking a question. To ask a question, please press *1 now. First in line, we have Mr. Ajay from India Capital. Kindly go ahead with your questions please. Good afternoon, hi. Hi. You know, your order intake for FY09 was roughly 69 million. Now, I am trying to understand how, you know, whether this order intake, what were the annuity revenue streams sort of not counted in this order intake versus what is counted? Okay. We do not count any annuity revenue in order intake. Order intake is only fresh orders booked in that quarter and that has got nothing to do with maintenance revenues and related annuity. It does not include it does not include BT either. So, our annuity revenue comes from two streams mainly. One is BT, one is maintenance revenue and, of course sorry, there is a third stream, that managed services revenue that we have on a continuing basis. None of these are considered in that year s order intake. So, when we look at order intake in FY10, for example, any managed services contract that we won last year and was countered towards order intake last year will not be counted the continuation of that contract in this year will not be considered as order intake for this year. So, it is counted once for the one year? Correct.
And how much what is the contribution of revenue from the annuity streams, the different annuity streams for 09? We have not quite given the split, but you could say that roughly 25-26 million dollars will be 25-26 million dollars of? From about maintenance and the rest will be from BT and managed services and all those things. And how much is so, overall how much is the annuity revenue stream? Overall, we are talking about probably in the region of about 48 to 50 million dollars, something like that, maybe 45 to 57 million dollars. Sure. If I look at, you know, and your backlog at this point is roughly 58 million right? 56. 56 full year. I am trying to see, you know, how does this work out, you know, your revenue in FY08 and FY09 was I guess together roughly close to between 90 to 100 million, right, and I didn t get you, what is that, the revenue was, what did you say? The revenue in FY08 and FY09 each was between 90 to 100 million, so let s take 190 million together. And you had a order booking of 1785, I am just rounding it off, so 1785, roughly 155, so you have 45 million gap and, you know, annuity revenue roughly 50 million. So, 50 million, I am trying to understand, you know, how this, you know, and your backlog at this point is 56 million. No, no, you can t I am trying to add this out. Order book does not go into the same year. Right, we are still going to backlog, right.
Yeah, some could go into backlog as well. Secondly, you do not have the opening backlog at the beginning of the two-year period which is required as well because we would have had an opening backlog at this point in time, right. And how much was this roughly? I don t have that handy with me at this point in time and then we should look at what is getting carried forward into the future years which also you don t have at this point in time with you. So, when I am talking about 56 million dollars of backlog, that is only for the current year. Okay. Now, there is some backlog which is going forward into FY11 and FY12. We don t have those numbers. So, you can t reconcile like this. Okay. And, you know, what sort of it seems like, you know, your order booking is sort of running at a faster pace than your revenues, even when your revenues are sort of flattish to declining, it sounds counterintuitive and if I take out 48 million from your revenue base, you are left with 45-50 million revenue and your order booking for both the years has been higher while the revenues are declining in dollar terms. How does this One of the reasons why this revenue has decline in dollar terms is because of the pound to dollar significant difference. The pound to dollar, it was 2 dollars to a pound at one point in time. Now, it is down to like 1.5 something, 1.6, so that has those things have an impact. Euro to dollar also kind of a similar impact. So, again it is not a straight math. You have to look at all those impacts to understand as to what sort of a decline we are talking about. Now, actually what I would say is it is not so much of a decline, it is kind of steady and last year, you know, the backlog that we have at this point in time and whatever we had last year, when you do all the math, you will see that the conversion from order intake to revenue has actually improved a little bit or at the least you could say it is kind of steady. Sure. And tell a bit about your cost structure, you know, going forward for, you know, incremental revenues, incremental 10 million revenue, what kind of cost you incur? Okay. It will be not proportionate to what would have been incurred. There is leverage in the, you know, there is nonlinearity in the system. So, let s say revenue goes from 95 to 105, cost will probably move up by about 2 or 3 million dollars.
So, it is roughly you are saying 70% of incremental EBITDA? But don t take that as a thumb rule for, you know, cost increases by 50 million. You can t quite take that, I am just giving you an example for this particular case. Surely, yeah. So, the EBITDA will expand significantly. And this will, you know, sort of over, if you are able to get say 20-30 million revenue increase over the next two-three years, will this sort of rule of thumb apply or you expect Theoretically, it should get better right. Sure, yeah. What kind of investments you think you will, when you sort of think of investing in your new products or whatever it is? That is a constant process, it doesn t stop. Sure. And one last question about your FCCBs, what is the company s sort of plan at this point, you know, given Currently, we haven t come up with any plan, so there is nothing that I can share with you. We haven t come up with any plan. No, but given that, you know, the conversion looks like a far possibility at this point what is your thinking about sort of redeeming the FCCBs, are you looking at, you know, some kind of restructuring or what is the thinking at this time? Well, all those I presume, I mean, all those are theoretical options. We haven t quite, I don t have anything, you know, firm or conclusive or I can t say that this is exactly what the company is thinking of doing. I don t have anything like that at this point in time to look forward. As Mr. Ajay s line has been dropped, we will go ahead with the next question sir. Yeah, go ahead. Next question is from Annah Sam from PQS. Kindly go ahead with your questions please.
Ms. Annah Sam: Ms. Annah Sam: Ms. Annah Sam: Ms. Annah Sam: Yes, Subash, I just wanted to check with you how what did you do to reduce DSO from 100 days to 41 days, are you getting giving a very strict collection term or what have you done? It is a combination of two things, one is, of course, the big reason is the collection. We have got some very strong metrics and our collection is extremely good. So, if you look at the collection for this year, we collected more than what we invoiced, which means last year, a lot of last year s invoicing also came in as collection this year. That is one reason. The second reason is that you see some provisioning, you know, there is some bad debt provisioning as well Right. which also has taken down the DSO, but even if you were to Right. get that back, it would not go, you know, it will not, maybe it will be 70 days or something like that, it will still not go well beyond that. Has the tightening the term affected your business intake in terms of buying, you know, sort of by the credit terms? You know, Annah, I am not able to hear you properly, your voice is getting chalked up, but let me just repeat myself, the bulk of the improvement has come from better collections. Ms. Annah Sam: Okay. Alright, my question was whether any of your customers are, you know, affected in terms of in terms of, you know, they giving you business, are they finding your terms too tight and therefore not, you know, it is harder for you to get the business. No, we don t find any issues with the customers. I mean, our terms of onerous, in the sense, I mean we are just being strict about collection which is just fine. So, we don t see any problems with customers giving us are you asking whether the customers are finding it a problem to place the orders with us because of our commercial terms? Ms. Annah Sam: No, they are not, they certainly are not. You should also realize that a lot of our revenues come from developed markets these days as well unlike, you know, three years ago, we had very little from developed markets, today we have a lot from developed markets.
Ms. Annah Sam: Ms. Annah Sam: Okay. The developed markets are quite naturally much better. Right, okay, thank you. Yeah, welcome. Thank you very much sir. Next in line, we have Mr. Yugal Joshi from Dawnay Day. Kindly go ahead with your questions please. Yeah, hi. I just wanted to understand that what kind of work does Subex do in its managed services business? In managed services, what we do is we provide it is all around our products only. So, for example, if it is managed services for fraud management, we would install the fraud management software in a server which could be at their place or in a data center. Then, we would actually manage that application to ensure that the application availability is 99.99% or whatever as per the SLA. So, the application is always up and running and then we will ensure that the application is upgraded on a regular basis, it is current, etc., etc., and finally which is the important piece in managed services, we would actually run the application for the managed application for them and give the results of the application to them. Okay. So So that the entire domain expertise required to run that and understand and interpret and all that will go from, so we will post a few people who will exclusively manage that application for them. This is what we so they don t have to build that expertise within their organization. This is what we do in managed services. So, this would be kind of like a recurring revenue for you? It is recurring. Okay. Of course, it is a monthly feed-in. Okay. And just one more question is that seeing a thrust by Indian operators on their value added services, what kind of opportunities does Subex think it has in its for its product? In value added services?
Yeah, I mean, does Subex, as in the prospect of Subex does get impacted based on the VAS base is so small and that the Indian telecom operators are sitting on? No, I mean, we don t have anything direct to do with VAS, but what we have is when VAS becomes a significant thing for operators, the potential revenue leakage there increases. Their need to manage all this will improve. So, that is where we would have a thing on VAS. So, that is how VAS would help us. Okay. Just one small question from my side is that your personal cost has gone down this quarter, so was it the combination of both as in reduction in employee numbers as well as salary cuts or something else? No, no, no, there are no salary cuts. In fact, in this year, also we have increments. The reduction in cost is essentially because we shifted work from high cost geographies to India. Okay. That is why. Yeah, thanks, that s from my side, thank you. Thank you very much sir. Next in line, we have Mr. Pradeep Swamy from Barclays Wealth. Kindly go ahead with your questions please. Mr. Pradeep Swamy: Yeah, just had a question back on the FCCB that is due in 2012, obviously it is trading at pretty distress levels and there is concern in the markets on debt servicing capability, especially with the coupon payment as well as redemption. So, would you be able to share any light on what the debt profile is like and what your plans are on the FCCB? Our current debt is less than 40 million dollars as on 31 st March. If I remember it right, it was something in the 35, 34 to 36 million dollar kind of number. Mr. Pradeep Swamy: But we still have the FCCB right No, no, no, I am Mr. Pradeep Swamy: which is 180 million dollars.
FCCB is what I meant. Now, on the FCCB front, as I said earlier, we do not have any current thoughts to share with anybody. We haven t initiated any firm action on that front. Mr. Pradeep Swamy: Okay, thanks. Welcome. Thank you very much sir. Next in line, we have Mr. Shekhar from Goldman Sachs. Kindly go ahead with your questions please. Hi sir. Just wanted to know like what is the debt figure as of now, what is the total amount of debt including FCCBs? So, if you look at 34 to 36 million dollars of bank debt How much? 34 to 36 million. Then, you have 180 million of FCCB. That s it. And you have to add the coupon, then you have to add that redemption premium to it, I mean, not coupon, redemption premium. Sir, right now, if I look at your company, most of the values actually, like of the enterprise value is basically the debt, there is not much of equity value and the size of the debt is huge as compared to what your earnings are right now. Alright. So, how do you intend to take care of this debt? Yeah, so essentially how does one the question can be rephrased as how does one intend to take care of FCCBs because the other one is not given the size of the company, 35 million dollars of bank loan, working capital, and all that is not a great
So, what does one intend to do about FCCB, my answer remains the same, I don t have anything firm to discuss at this point in time because we have not quite gone down that far as yet. But do you have the cash flows to, in the sense like to say if you were to buy these FCCBs back, your cash flows won t be sufficient and in that scenario, are you planning to raise some money or something? Well, as I said, we have not thought about anything, but I can tell you about cash flow. If one were to look at cash flows for the next three years which is when the debt would be the FCCBs would be due, we certainly would not have cash flows anywhere near what is required for FCCBs, certainly not, we will be way behind, that we can easily make out from the numbers right. Correct, correct. And how are these FCCBs tradable, in the sense like what is the discount that they are trading at? What is the discount, well, I don t quite know exactly, but yet they are tradable. Okay, sure. Thanks a lot. Welcome. Thank you very much sir. Participants who wish to ask questions may kindly press *1 on your telephone keypad. I repeat, participants who wish to ask questions may kindly press *1 on your telephone keypad. At this moment, there are no further questions from participants. I would like to hand over the floor back to Mr. Subash Menon for final remarks. Thank you. So, as I said initially, the company has definitely turned around, there is no doubt about it. However, we do not, you know, the profit is still not all that high. We do have and that has to come back up and we seem to we did have an issue in quarter four with our order booking and order intake, that has to improve. Hopefully it will improve with the coming quarters. The consolation there is that we did not lose orders, so hopefully the orders are still out there for us to win and we will win them in time. FCCB is still an open issue, I don t have anything to share on that front. I do understand that that is a major concern from everybody, but we haven t quite gone down any farther there to share anything, I am sorry about that. So, that is it at this point in time, nothing else to share. Thank you very much. Have a wonderful evening, morning, whatever, wherever you are. Byebye, thank you.
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