In a conference call today, Lucas Skoczkowski, Redknee‘s CEO, told analysts and media that the acquisition of insolvent Orga Systems, “positions Redknee as the largest independent provider of choice for real-time monetisation and subscriber management software platform.”
VanillaPlus broke the news of Orga’s insolvency on April 10, 2015 (see: Orga Systems applies for insolvency as German court appoints administrator to save business and 650 jobs).
We then reported the company’s sale to Canada-based Redknee on June 24 (See: Redknee to acquire insolvent Orga Systems’ real-time monetisation assets and most staff for €38m in cash). (Also see: Redknee completes Orga Systems acquisition.)
Orga Systems’ technology and expertise have been acquired, says Skoczkowski, “to enhance Redknee’s real-time monetisation and subscriber management platform.” By acquiring Orga from the German insolvency process (it was in the first stage), the Canada-based firm believes that the combined businesses will accelerate Redknee’s expansion into additional enterprise markets.
As Jeremy Cowan now reports, additional cost savings are said to be possible and the deal is expected to be accretive in fiscal year 2016. The purchase price of US$42.3 million — an estimated two times recurring revenues — has been financed from cash on Redknee’s balance sheet.
Orga’s cost structure was reportedly reduced prior to the acquisition’s close. As part of that exercise Orga Systems’ headcount has fallen from 668 on December 31, 2014 (it was 731 at the end of 2013) to 546 employees today.
Three strategic rationales
The new management, led by Lucas Skoczkowski and Redknee’s CFO, David Charron, described three strategic rationales to analysts. The first is an increased global reach. Skoczkowski sees opportunities in Latin America, Asia-Pacific and EMEA (Europe, Middle East & Africa). Orga Systems, he says, brings its new owners “about 45 customers with recurring revenues, and minimal customer overlap.” Some customers have been with Orga for up to 20 years.
According to Redknee, the second tangible benefit of the deal is that it opens up new vertical markets. These include Orga Systems’ existing customers in smart energy, connected cars, and transportation. The business, formerly headquartered in Paderborn, Germany, also brings additional product offerings.
The third strategic rationale for the deal is an expanded enterprise platform for Redknee. This incorporates an experienced team, complementary products and services, and the acquisition of intellectual property in the form of patents — Redknee now holds 29.
David Charron reports that revenues in the six months ending June 30, 2015 were $20.7 million. The cost of goods sold (COGS) was $9.7 million (47%). Normalised EBITDA was negative $6.0 million, leading to a net loss of $16.5 million (80%). Revenue in the first six months of 2015 was made up mainly of services at $9.5 million (46%) and support at $10.8 million (52%). Software and third party revenues each accounted for just $0.2 million (1%).
Skoczkowski says, “It’s analogous that when Nortel announced its bankruptcy its revenues dropped dramatically. But we’ve been very encouraged by customers’ response.” He characterised the conversations with Orga’s top customers when Redknee took over in one word, “relief”.
Orga’s top customers include Telecom Italia in Italy, Brazil and Argentina. Historically, the top five represented about 30% of revenues. Recurring revenue is now estimated by Redknee to be approximately $20 million per year.
‘Customer for life’
Looking forward, Redknee’s priorities for the Orga Systems assets are to instill “our own customer for life” approach, expand the base revenues by rebuilding the pipeline, and drive accretion. In practice, this last goal will mean further streamlining costs and focusing on working capital optimisation. Redknee does not want to talk numbers on R&D costs yet, but they intend to drive these costs down, “sub 20%”.
“Our objective,” says Charron, “is to get the cost structure in line with revenues. If there’s anywhere we invest now it will be in sales.” He adds that, “Most of the parent company’s liabilities were not part of the acquisition deal.”
Skoczkowski is complimentary about his new team. “Orga had excellent customer service, and they have good people on the ground. We don’t have any customers in a difficult project stage, the team we acquired has done well.”
Customers had expected the company to be sold, he says. None expected Orga to go through the first stage of insolvency. All the customers initiated reviews when Orga was declared insolvent, but many have cancelled this now.
Will Redknee integrate Orga Systems’ platform with its own?
Skoczkowski is being discrete. “We’ll do a roadmap,” he says. “We have a plan to combine releases into a single release path. I’m confident of the revenue picture, and I expect to be able to share with more clarity by the end of 2015.”
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