The Hindu Business Line : <I>Shabash </I> Subash

Subex Systems is among the few promising product companies in India focussed on the telecom market space. Its two products — Ranger (a Fraud management solution) and INcharge (Revenue Assurance and Cost Management solution), — with a third one in the development stages put it firmly on the product track. Speaking to eWorld, Subash Menon, President and Chief Executive Officer, and the company's public face reiterated that "Our focus is clearly on products. We are a products company and we will grow as one." Over the next three years, he expects 75-80 per cent of their revenues to come from products, up from about 40 per cent at present. In the course of over an hour-long interview, Menon talked at length about trends in the telecom space and Subex's positioning in this turf. Excerpts:

HOW do you sense the telecom environment worldwide shaping up over the next year or so?

We see the telecom situation stabilising in 2004. In 2003, there have been some cuts in capital spending. In 2004, we expect that to kind of stabilise, with no further cuts and growth from 2005 onwards. Traditionally, in the telecom industry, capital spending has been 15 per cent of revenues, but during the boom period, it went up to 28-30 per cent.

This is where things went wrong as this kind of a capex rate was not sustainable.

It also meant overinvestment, with prospects of lesser investment in the future. In the past three years, namely 2001 to 2003, there have been progressive cuts and now this year it is expected to be 10 per cent less as compared to last year's investment.

This will take the ratio of capex to revenues to about 15-16 per cent of revenues, back to where it was before the boom and to a number which is sustainable.

Do you think with a resurgence in capital spending, revenue maximisation will become less of an imperative for companies and thereby for the products in your portfolio?

In these bad times, we have shown what one can get out of the network through our products. Do you think a CFO will let go the opportunity when things improve? It does not make sense.

Even when we talk about the resurgence in capital spending, it will not be of the order of 30 per cent as it was earlier. As against five years ago, now the competition is going to be huge and is going to only go up.

When that happens, the telecom companies or telcos need to improve productivity, and they will have to squeeze their investments as much as possible.

Going forward, the interesting thing is the expectation that data will bring in a lot of revenues for the operators.

Over three to four years, this has to happen, given the licence fee and investment of all players. The content-based billing possibilities, which are present for data, are missing in voice. Someone can download a piece of music which will cost Rs X.

Someone can download a novel which will cost Rs 4X. Or an X-Ray which is 8X or an MRI which is 20X. When data comes in, the value proposition of the service will also come in. For voice, it is the same, whether it is an ordinary call or emergency call.

Or a teenager calling another teenager, the price is the same. Whereas in data, differentiation is possible. So, once content-based billing is up and running, operators will do this.

We, and operators, believe that as things move more and more towards content-based billing, their exposure and financial impact could be several times, which cannot straightaway be quantified. And this will also lead to revenue leakages.

The next logical question is: Why do leakages happen? One, it could be because of technical or human error.

The other one is deliberate, which is fraud. So, if there is a fraudster out there and he knows that `if I steal this particular minute, I save Rs 5 or another one, I get Rs 50' you know which one he would choose. So, we think the significance of revenue maximisation is actually going to go up further.

From a scalability perspective, how are you enhancing your product business?

We are still the new kid on the block from the products perspective.

We have been in the market for about three-and-a-half years. So, it is early days yet. Out of Rs 70 crore, we have Rs 25 crore of product revenues and Rs 45 crore of service revenues. These service revenues are pure onsite revenues. In the financial year 2003, while 36 per cent of the revenues came from products, nearly 80 per cent of the profits came from them. Only the remaining 20 per cent came from services. We expect this trend to continue or go even more in favour of products from a profitability perspective. In the next three years, we expect products to contribute about 75-80 per cent of the topline. At which time, from a profitability perspective, it will contribute 95-96 per cent.

Our focus is clearly on products. We are a products company and we will grow as one. We are looking at a 35-40 per cent growth annually in products revenues.

On the scalability front, initially we had one product. Now we have two products — Ranger (a Fraud Management Solution) and INcharge (Revenue Assurance and Cost Management). When these two products come together, they form a suite. These products are not only a suite, they are a platform on which we can add on more products.

Right now, we are working on enhancing the suite with a third product which is also in the revenue maximisation space. We will come out with it next year.

Given the telecom meltdown and dependence on capex, do you think developing products in the telecom space is a good idea?

We believe that there is a lot of potential here. One of the reasons is that fraud is a relatively new space. Fraud is about five years old in the real sense.

And the revenue assurance space is only about two years old. These are still in their infancy, from a market size perspective. In fraud management, only 27 per cent of telcos have fraud management systems installed worldwide.

Out of 27 per cent, 60 per cent have in-house systems. That leaves us nearly 70-80 per cent of the market to exploit for future contracts.

If you look at INcharge, the potential is even higher, since it is a new space. Today, every Indian GSM operator has a fraud management system in place.

The biggest challenge for a product company seems to be the sales and marketing expense. How are you managing this aspect?

We are definitely not investing as much as the overseas vendors are in sales and marketing. We do not have the financial wherewithal to do that. Having said that, the question also is: Is there a sensible return for that kind of investment.

The telco world is one of references. We have to be on trade shows and sponsor events and the like. It creates a nice feel-good factor. And it shows credibility, financial stability and visibility.

Today, we are the No. 2 player in the fraud management space. We have 62 installations through networks in 16 countries. We are listed with Intel Capital as one of the investors in the company.

We are also helped by the fact that we have only a finite number of operators to work with — it is a large number, but it is still a defined set. So, we go to them directly and demonstrate our capabilities.

And the biggest thing here are our references.

Our development of INcharge was based on a scaleable business model. We currently have 62 installations with Ranger and 5 with INcharge (launched in February). All these 5 are part of the 62 installations. We still have 57 left. Hence, our sales and marketing costs are going to be significantly less than what it was for Ranger.

The second thing we are doing is bundling the two products together. The sales cycle is still eight to 10 months and the cost of sales is also the same.

Even our cost of implementation is only marginally higher. But our value of the contract is 70-80 per cent higher. So, the second product will get sold in the wake of the first product. The third (which is under development) will get sold in the wake of the first two. This is the scaleable structure we have in place.

From a revenue perspective, how do you propose to reduce the volatility in your product business?

The answer to that is annuity revenues and getting more and more business from existing customers. As we move forward, our AMC (annual maintenance contract) revenues and revenues from our existing customers will keep going up.

For example, in this year's plan, almost 40 per cent is from existing customers. That is more predictable and this has to keep going up. As of now, we have sold about $15 million of products cumulatively. Our AMC is around 15-20 per cent.

So, we are talking about $2-2.25 million as AMC. We plan to do the same thing by building up an existing customer base with steady revenues.

That will form the base and so that the spikes are not so prominent.

maverick@thehindu.co.in

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