Well poised to post strong growth…

We attended the virtual analyst meet of Subex. The company was founded in 1992 and provides software products & related services to communication services providers globally. Subex historically made acquisitions, which impacted its financials and led to higher debt. It also led to exit of its founders. Over the years, the company has managed to reduce debt significantly and stabilised its operations. Going forward, Subex believes it can grow its core business (~95% of revenues) at 10% while remaining (5% or $2 million) new business is expected to grow to US$18 million in coming years. Hence, with a combination of the above, we believe the company is poised to grow at a CAGR of 18-20% in coming years.

Three-horizon strategy to turnaround company

The company has divided its products in three categories 1) Horizon 1 that is products like Business Assurance, Risk and Fraud Management, Partner Ecosystem Management, Network Analytics. These are core traditional products focused on risk management, contributing 95% to total revenue. It is a cash cow and more of an annuity kind of business.

The company caters to over 200 telecom customer with British Telecom, the largest client. Subex claims that 20% of global traffic goes through it. It is expected to grow at 10% per annum over the next two to three years aided by 5G rolling off. 2) Horizon 2 includes products focused on internet of things (IoT), security, & analytics and 3) Horizon 3 is products focused on analytics and automated anomaly detection offering. Horizon 2 & 3 are growth products based on subscription based models.

The company can sell these products not only to telecoms but also to BFSI, manufacturing, fintech & e-commerce. H2 & H3 can be quickly embedded to the customer’s current solution. Hence, they do not have to go through with the long process of changing whole old model and switch to new mode. These products are expected to grow to US$18 million from current US$2 million in the next two to three years. Hence, with a combination of the above, we believe Subex is poised to grow at a CAGR of 18-20% in coming years.

Valuation & Outlook

Subex has, over the years, reduced its debt and improved its financial performance. Going forward, the company believes it can grow its core business (~95% of revenues) at 10% while remaining (5% or $2 million) new business is expected to grow to US$18 million in coming years. Hence, with a combination of the above, we believe the company is poised to grow at a CAGR of 18-20% in coming years. Subex also aspires to maintain its current margins. However, with resumption of travel, subcontracting cost, increase in R&D expenses, we believe it will be difficult to maintain margins. At the CMP, the company is trading at EV/sales of 8x and P/E of 62x.

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