growth software multiple is justified. We maintain our BUY rating and $7.50
target price, which is based on 11x–12x FY2015E EBITDA or a 5%–6% FCF yield using FY2015E.
Details
Redknee (along with Sandvine) is a Play on Customer Retention and Revenue Optimization. At MWC,
we attended several of the keynote and panel sessions. The panel session on using analytics for insight that
could help retain existing customers was the only session we attended that was standing room only. A study of
8,700 consumers by Nokia Solutions and Networks indicated that almost 40% of subscribers are considering
changing their wireless provider. There was keen interest among those in the room — most of which appeared
to be with service providers — in exploring the application of big data and analytics to customer care practices.
The Analyst Day Event Had Specific Examples. Investors (a full room) in attendance saw the ability to set
up real-time promotions (in a matter of minutes for an operator) that leverage social media. Redknee customer
care allows agents to both monitor social feeds and take action on subscriber accounts (setting up a trial of a
new service tier to help with congestion complaints). Data monetization is around events with the network that
trigger relevant promotions and purchases. The common advantage of Redknee is the ability to act on real-time
networks events (not batching for offline analysis) and to do so at scale in networks of 10mm+ subscribers.
Back to Barcelona: The M2M Opportunity May Not be Front-Burner for Management, but the
Potential is High and the Required Investment is Low. Redknee has couched the opportunity for verticals
outside of telecom as 3–5 years away from being material. We believe that this could be conservative — and
what IS clearly happening right now is that early presence with partners is increasing visibility of Redknee on
the telecom side — an intangible benefit. This year, the company is looking for 1–3 pilot engagements. The
distribution model will likely be direct through select accounts, but predominantly alongside partners like
Accenture and Landis+Gyr.
Feedback from Accenture was Very Positive. Accenture had a large but private booth at MWC, where
invitation-only demonstrations were given on different “connected solutions.” The connected home —
basically a security setup — featured Redknee billing and customer care software. Accenture told us that
“basic integration” with Redknee cloud solutions was done in only two weeks. Accenture aims to package
different connected solutions and sell to either service providers or vertical market players.
Imagine the Scenarios in Smart Metering. We saw a demonstration of a fictitious user with a prepaid meter
who was able to remotely monitor energy usage by device and “top-up” the meter if need be (very similar to
the telecom market). We understand that the solution could also be used for solar energy creation — managing
credits for supplying power back to the grid — which could provide greater transparency to customers and
reduce call centre volumes. Utilities will be able to switch customers between post-paid and pre-paid models,
sidestepping bad credit risks in some countries.
M2M Could be Another Way to Penetrate New Customers. We had the chance to briefly talk to a large
group operator (and existing customer) at the Redknee booth. Executives were there looking at options for new
M2M services. More interesting to us was a tier-1 European operator at the Accenture booth who was not a
Redknee customer, but was similarly kicking the tires on additional service opportunities for its installed base.
M2M could potentially open the doors to additional new customer conversations.
Outlook
Updating Estimates: Redknee Issued 14.7mm Shares or Dilution of about 15%. In our view, the financing
solidifies the balance sheet for larger ($50mm–$100mm) opportunities that may need substantial transitory
working capital investment. There is also the question of additional M&A opportunities now that integration of
the NSN business is virtually complete; management has discussed being in the market for deals again in 2014.