RE:TDW Update -- details part 1 Why Stay Overweight Given the Run in the Stock? Ou
r View is that Redknee is a Play on Several
Tectonic Shifts in the Billing Business.
Remember How Starved the NSN
Base Has Been for Updates
. It has arguably been two years since
NSN declared its billing unit to be non-core. There are around 130 tier-1 customers on the NSN platform,
and management believes that one-third are two releases behind on the software.
Exiting F2014 Should be
the Timeframe to Upsell.
This includes additional or upgraded modules such
as a real-time subscriber portal, a d
ealer portal, enhanced customer care, active analytics and an intelligent
promotions engine. Integrated Redknee technology, sold into the NSN installed base, deployable in the
cloud. Management believes that this could drive a 15% growth rate exiting F2014.
LTE Deployments (Particularly in Europe) Are th
e Sort of Technology Shift That Invites a
Replacement Cycle.
EMEA was 59% of revenue in Q3/13. We believe that Redknee will benefit as the
LTE wave hits Europe. We heard EXFO management
say that Europe was around 1–2 years behind. We
understand that nearly 20% of U.S. wireless connections will be LTE by the end of 2013 vs. less than 2%
in the EU. The bandwidth of an LTE
connection enables differe
nt usage patterns and different charging
models, and we could see new competitive displacements for Redknee based on its more flexible, cloud-
based system.
The Speculation About Alcatel
Lucent Could be Positive.
There is speculation that Nokia may acquire
the wireless business and related assets from Alcatel Lucent. Presumably, Nokia would have little interest
in re-owning a billing business. Redknee is not a likely acquirer, but the confusion in the customer base
could create replacement opportunities.
There is Also a Valuable Option
in the Potential to Extend the Re
dknee Platform Beyond the Telecom
Vertical.
The company has a full suite of converged billing and customer care solutions deployable either on
premise or in the cloud. Telecom has arguably the most complex billing environment, and Redknee is well-
positioned to leverage its expertise (and its cloud deployment option) to other verticals. The Redknee Utility
Suite provides dynamic rating and billing for electricity, water, gas and even energy creation. Utilities can
remotely connect and disconnect smart meters, and subs
cribers can use mobile devices to look at real-time
consumption patterns and energy bills. There is very little
revenue from alternate verticals at this point, but this
is a growth option that could be significant in the next
2–3 years as connectivity di
srupts the charging model of
other industries.
Our Q4 Expectations are Modestly Below Consensus.
We expect Redknee to report its results Mid-
December. We are modeling revenue of $57.5mm (consen
sus $60.1mm) and EPS of $0.03 (consensus $0.04)
given our view of European seasonality. Redknee reported 59% of revenue from EMEA in Q3. Watch items
include what if any elements of F2014 guidance is provided by management, any update to the expected 10%–
15% revenue attrition, and the progression of the EBITDA margin to the mid-term goal of “low-teens” and to
the ultimate goal of 20%–25%.
Valuation
Using our FY14 estimates, which include a full year of
projected NSN contribution, the stock trades at 1.7x
EV/sales and 3.8x the maintenance revenue. Recent sector acquisitions have been completed at a median 1.4x
sales, and Redknee prior to the acquisition traded at 1.0x-1.5x sales. On EBITDA, the stock is 11x FY14E.
Justification of Target Price
Our target price is $6.50 (from $5.25) based on 14x
F2015E FCF of 9x F2015E EV/EBITDA. This is a
justified premium in our view to legacy billing ven
dors such as Amdocs and CSG Systems at 7x–8x EBITDA.
In our view, upside comes from more confidence in th
e organic growth profile, driven by competitive wins.
Key Risks to Target Price
1) Deal/integration risk associated with the announ
ced NSN transaction; 2) lower adoption of wireless
services; 3) quarterly revenue is volatile based on sh
ifting customer deployment schedules and timing of
large orders; 4) purchasing power of customers; 5) cr
edit risk of customers in high-growth markets; 6)
competitive solutions from a wide range of companies,
some considerably larger; 7) underachievement of
target operating metrics; and 9)
foreign exchange fluctuations.