TD Securities Update part 4 Update and Changes to Our Investment Thesis
Pipeline is at All-time High; Sales Cycles are the Uncertainty. Management reported "a handful" of nearterm
opportunities in both the Americas and Asia Pacific regions, and expects to be in a position to announce
some sizable new wins by fiscal Q4/Q1. In some cases Redknee has passed technical selection but
procurement and commercial terms can take 2-3 quarters. The company said that Q2 revenue upside was a bit
of an aberration and revenue should normalize in the low-to-mid 60's range. We model $63-$64mm for Q3 and
Q4.
Support Weakness is as Expected and is Now Largely Behind Us. Adjusting for the $3.5mm in support that
slipped from Q2, the decline of $3.8mm Q/Q is due to known churn by customers transitioning off the NSN
platform. Management said that any remaining churn would not be until FY15 and would be smaller. At the
time of the acquisition there was expected to be 10-15% revenue attrition from the NSN base – but $115mm of
Q2 annualized support remains in our view better than the original target.
Working Capital Machinations Continue, But the End is in Sight. Redknee invested a further $19.0mm in
working capital (following $20.0mm in Q1). The company noted that it has already collected $35.2mm in
receivables since quarter-end and invoicing and collections processes are improved but not yet reflected in
results. Q3 cash flow is seen being impacted again as the company continues to clean-up its balance sheet;
however management sees working capital normalizing in Q4 with cash flow from operations beginning to
show through. Redknee had net cash of $67.8mm as of quarter-end.
M2M is an Interesting, if Distant, Application of Redknee's Technology. The telecom vertical arguably has
the most complex charging system of any market and we believe Redknee systems could be adapted to other
markets (think utilities, toll highways, automotive). This is a 3-5 year scenario and unlikely material to nearterm
financial performance but the potential applications are substantial in our view. Redknee spoke on the call
about opportunities in the smart homes market where there is potential for deployments of ~50mm homes.
Redknee is approaching these potential applications largely through partners at this juncture (Siemens and
Accenture, for example).
The Ongoing LTE Deployment Cycle Creates Opportunity for Competitive Displacements. The adoption
of LTE and new charging models is the kind of technology shift which could drive carriers to reevaluate
legacy billing systems. We think Redknee has arguably had one of the more innovative rating and charging
platforms for years. With the NSN BSS business, the company also now has the scale to deliver to both
existing and prospective customers, particularly in Europe which