Mavenir struck by Moody's blues on sinking feeling about sales

It has not been the best few months for Mavenir. The sales it generates from radio access network (RAN) products are understood to have dropped substantially this year, with market share more than halving. It has fallen out of the top-five ranking of mobile core vendors, according to analyst firm Dell'Oro. With Nokia, it has provoked a public spat, which does not sound very simpatico given that open RAN – Mavenir's religion – is supposedly about friendly coordination with rivals. And it has just been downgraded by Moody's, a prominent ratings agency.

The Nokia spat arose when Pardeep Kohli, Mavenir's boss, took to LinkedIn to air some of his views about traditional vendors and their technologies. "I do believe going forward, that even Ericsson and Nokia will not be able to justify making the required investments and continue to build proprietary 5G/6G systems when alternative options are available," he said. "If 5G does not succeed, there will be no money for 6G."

Mark Atkinson, the man in charge of Nokia's RAN portfolio, was quick to respond in the comments section on that post. "Might be better to focus on your own business than worrying about the health (and the ability to continue to invest in R&D) of Nokia and Ericsson," he said. "CSPs [communication service providers] continue to rely on us to provide highly performing and efficient RAN technology, which enables them to compete and make money in both consumer and enterprise segments (while also supporting critical national infrastructure)."

A broader industry slowdown, linked to inventory build-up by North American customers and subsequent spending cuts, has clearly had some impact on all vendors this year. Nokia, using analyst research, has lowered its forecast for addressable market sales, while revenues at Ericsson's main networks business dropped by 13% on a constant-currency basis for the second quarter, compared with the same part of 2022.

But Mavenir's difficulties have now prompted the Moody's downgrade. The ratings agency had previously assigned Mavenir a B3 for its corporate family rating (CFR), described as a long-term rating that reflects "the relative likelihood of a default on a corporate family's debt and debt-like obligations and the expected financial loss suffered in the event of default." Anything with a B in it is considered speculative and subject to high credit risk. Mavenir, though, is now a Caa1 after this week's change. "Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk," says Moody's on its website.

Just what the truth is

The agency explains its decision with reference to the market slowdown as well as Mavenir's heavy reliance on one customer – unnamed but possibly Dish Network in the US. "The downgrade of the CFR to Caa1 reflects significantly lower revenue and EBITDA expectations over the next 12-18 months, due primarily to economic uncertainties, slower than expected radio deployments, and a significant delay by a major customer to deploy Mavenir's solution in a fixed wireless architecture."

Owned mainly by Siris Capital and Koch Industries, Mavenir disclosed financials only when it was preparing for an initial public offering (IPO) in 2020. The IPO was subsequently aborted, with Mavenir instead raising $500 million in April 2021 when Koch became an investor. But the prospectus it had previously filed with the US Securities and Exchange Commission showed revenues were up from about $393 million in 2018 to $427 million in 2019, with losses narrowing from $97 million to $81 million over this period.

The last significant update on financial performance came in a LinkedIn post by Kohli about seven months ago. Sales topped $500 million last year for the third year running, he said (implying they rose quite sharply in 2020 but have been flattish or down since then). Open RAN sales had grown from about $7 million in 2020 to roughly $100 million, according to Kohli's update, while packet core revenues were also approaching $100 million from just $17 million two years before. Network-based RCS and CPaaS initiatives were flagged as "negatives."

Various other company updates show that Mavenir has raised as much as $750 million in private equity financing since it abandoned IPO plans, along with another $100 million in debt financing. Much of that has gone into the development of radios (giving Mavenir hardware as well as software expertise) and systems integration skills. Another chunk was apparently used to plug gaps in its portfolio that had hindered progress with brownfield operators. But Mavenir seems to have quickly burnt through funds.

"Weak liquidity was also a driver, with very limited cash, revolver capacity or alternate forms of committed capital," said Moody's in its note about the downgrade. "Based on management's current forecast, EBITDA will rise despite revenues declining by near mid-single digit percent, lifted primarily by significant cost savings targeted near $110 million over the next year."

Melancholy men

Mavenir employed 4,116 people in September 2020, according to its SEC filing that year, but the number had soared to about 6,000 by August 2022, according to a report by Mobile World Live. Since then, however, it has cut jobs without disclosing details of how many. "We are reducing people in HQ and are hiring back in regions that are important to focus on the large RAN and packet core deals," said John Baker, the company's SVP of business development, in a LinkedIn message to Light Reading sent in April. A search today on people listing Mavenir as "current company" on LinkedIn generated 3,700 results.

A big problem for the vendor is likely to be the growing demands of research and development (R&D). In open RAN, Mavenir started out as a software specialist, but it has subsequently expanded into systems integration and hardware. Somewhat awkwardly, that sends the message that specializing did not work when open RAN is supposed to be about combining experts in particular fields. Even more awkwardly, it forces Mavenir to either invest a lot more in R&D or spread funds thinly across various activities.

As Moody's goes on to say: "There is, however, uncertainty given very high governance risk with private equity sponsors pursuing an aggressive growth strategy with very high research and development costs (over 50% of revenue) driving significantly negative free cash flows." With analysts not expecting RAN product sales to grow for the next few years, and much bigger firms targeting the same open RAN opportunity, conditions seem unlikely to improve.

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— Iain Morris, International Editor, Light Reading