RE: RE: TDW on Marketing Meetings with CEO part 3 Details
The goal is $500mm of revenue (organic growth) in 3-5 years with 20-25% EBITDA margins. Penciling
in these targets using just the low-end of peer and takeout valuations suggests this could mean a $5-$6 stock a
couple of years out. Management reiterated near-term EBITDA margin targets of “mid-to-high single-digits”
in the first year and “low-to-mid teens” in year-two. The integration should be mostly done by April 2014 (one
year).
Management has been positively surprised in the early days of the integration. Comments that were made
during the meetings included that: 1) employee retention is 99% (recall that NSN had already restructured ~1/3
of the workforce prior to the deal); 3) integration of the R&D teams that was scheduled for later this year is
already underway; and 3) the technology that was acquired has internal expectations.
Management reiterated the strategy on growing revenue and margins at NSN. The first objective will be
properly charging for maintenance. After unbundling the billing business from larger hardware contracts there
is the opportunity to move maintenance rates from the 5-7% (hardware rates) to the normal 15-20% range
(software rates). There was some pushback during meetings on the ability to push through these price
increases. We think management did a good job of outlining that its software is mission-critical for providers
and in this context moving to fair maintenance rates will be accepted. Redknee sees the opportunity to grow
the maintenance revenue 25% over the next three years (which to us seems like a conservative target).
Selling upgrades to a starved base is another opportunity. Management has previously talked of the
potential to upgrade 30-40 clients to a newer solution (of the 130 that came in the acquisition). This seems
achievable given prior comments that 1/3 of customers are on a release two generations old. This could equate
to a $200mm license opportunity, as well as $100mm+ of services that Redknee hopes to deliver in partnership
with systems integrators (Accenture, CGI Group, Cap Gemini, etc.).
The long-term potential in different verticals was discussed. This is something we have written about
previously. Given the challenges of real-time and connectivity, the telecom market has arguably the most
complex charging systems of any vertical and these systems cannot have downtime. Keep in mind that for
some transactions its algorithms check 200 parameters to evaluate the profitability of what you have done