Monday, October 28, 2002
Challenges remain after its disastrous performance for the
first quarter ended June 2002, Hughes Software Systems (HSS)
has posted a relatively better show in the second quarter
ended September 2002. The company improved its margin due
to cost-cutting measures and met the market expectations.
However, it is the new capitalisation policy which helped
it post a 31% rise in profit before tax (PBT) during the quarter.
HSS continued to be cash flow positive, and there was a significant
improvement in client quality. The company also added 13 new
customers during the quarter including 11 for products and
2 for services. Acterna, ETRI, Innoace, Intracom, Laboratory
for Technical Services and Spirent were
added to the customer list.
Although the sequential performance looks encouraging with
a 10% growth in sales and an 89% growth in profit after tax
(PAT), it should be noted that the first quarter performance
was very disappointing. Hence, the performance for this quarter
is more or less a pullback from the last quarter. Also, the
management still continues to have a negative bias towards
the telecom segment, overall. Commenting on the future, President
and Managing Director Arun Kumar said, "We expect continued
challenges in the telecom vertical, specially for our products
business."
For the second quarter ended September 2002, HSS posted a
3% fall in sales to Rs 52.1 crore. The cost-cutting measures
of the company yielded results as staff costs fell to 45.9%
of sales (from 48.9% of sales in the quarterended September
2001) and other expenses were down to 24.2% of sales (26.5%).
On the other hand, travelling and conveyance expenses continued
to mount up and were at 10.6% of sales (7.3%).
With control on costs, the operating profit margin (OPM)
improved to 19.4% from 17.4% in the corresponding previous
period. This led to a 9% rise in the operating profit (OP)
to Rs 10.1 crore. But, the other income (OI) fell 53% to Rs
1.8 crore, perhaps mainly due to the appreciation of the rupee
during the quarter. This affected the profit before interest,
depreciation and taxation (PBIDT), which was down 9% to Rs
11.9 crore. Depreciation fell 2% to Rs 5.2 crore. However,
it was the policy change related to capitalisation of product
development costs, which boosted PBT.
HSS incurred Rs 9.1 crore on product development and research
and development (R&D). Out of this, it capitalised Rs
4.2 crore during the quarter. Of this, Rs 0.7 crore was amortised
during the quarter. Thus, the net capitalisation cost was
Rs 3.5 crore during the quarter. The company, which changed
the policy from the beginning of this year, incurs cost to
develop standardised software modules for sale. Capitalisation
of software development cost begins upon establishment of
technological feasibility and ends at the time the software
is available for release to customers. Software development
cost is amortised on a product-by-product basis.
This change in policy helped the company to post a 31% rise
in PBT to Rs 10.2 crore. Provision for taxation was up 27%
to Rs 1.9 crore. PAT was up 32% to Rs 8.3 crore.
HSS was expected to post net profit in the range of Rs 5.23
crore and Rs 9.30 crore and sales in the range of Rs 48.5
crore and Rs 52 crore as per a poll of analysts by capitalmarket.com.
On a quarter-on-quarter (q-o-q) basis, the sales were up
10%. OPM, at 19.4%, was slightly better than 18.4% recorded
during the quarter ended Jun. 2002. OP was up 16%. But, the
lower OI impacted PBT, which was up 5% sequentially. PAT was
up 89% sequentially as the current quarter had no provisions
related to bad debts, which had reduced the profitability
in the quarter ended Jun. 2002.
Although the q-o-q performance seems to be encouraging, it
should be noted that the first quarter performance of the
company was very disappointing and, hence, the performance
for this quarter seems to be better sequentially.
The services to HSS's parent, Hughes Network Systems (HNS),
contributed 29% (Rs 15.11 crore) of the total sales during
the quarter ended September 2002 as against 46% (Rs 24.66
crore) during the quarter ended September 2001. However, this
represented a fall of 39% y-o-y, but a rise of 3% q-o-q.
The sales from 'Other Services', i.e., services to customers
other than HNS, were up 11% to Rs 24.49 crore and contributed
47% (41%) during the quarter. Also, this represented a growth
of 17% sequentially. Higher volumes contributed towards this
sequential growth.
The company had earlier during the year indicated that these
professional services have stabilised and, with its entry
in the telecom serviceprovider (TSP) space, this part of the
revenue stream should witness a good growth during this year.
The management claims that the TSP business continues to grow
and build a healthy funnel.
Notably, HSS added 2 new customers for services during the
quarter. Also, it witnessed an expansion of its relationship
with NEC and Nokia, and bagged repeat orders from JCI, SS8
and Leapstone.
The products business had witnessed a sequential fall during
the quarter ended June 2002. It has performed relatively well
during this quarter with a 79% rise in sales to Rs 12.5 crore,
representing 24% (13%) of the total sales. This also represents
a 6% rise in sales sequentially. The sequential
growth was on account of closure of certain deals, which spilled
over from the previous quarter ended June 2002.
On the current equity share capital of Rs 16.8 crore, the
adjusted earning per share works out to Rs 10 on an annualised
basis. The HSS stock closed 5.2% up at Rs 153 on 11 October
2002, the day when the company announced its results during
market hours. **
PBT boosted by change in policy related to capitalisation
of product development costs
Hughes Software Systems : Results
-------------------------------------------------------------------------
Particulars 0209 0109 Var. 0209 0109 Var. 0203 0103 Var.
(3) (3) (%) (6) (6) (%) (12) (12) (%)
-------------------------------------------------------------------------
Sales 52.10 53.60 -3 99.50 117.00 -15 234.90 198.50 18
OPM (%) 19.4 17.4 19.0 26.6 30.6 36.3
OP 10.10 9.30 9 18.90 31.10 -39 71.80 72.10 0
OI 1.80 3.80 -53 4.20 7.00 -40 13.20 11.00 20
PBIDT 11.90 13.10 -9 23.10 38.10 -39 85.00 83.10 2
Interest 0.00 0.00 0.00 0.00 0.00 0.00
PBDT 11.90 13.10 -9 23.10 38.10 -39 85.00 83.10 2
Deprecn 5.20 5.30 -2 10.40 10.10 3 21.10 14.90 42
Capitaln of prod
Devt cost 3.50 0.00 7.20 0.00 0.00 0.00
PBT 10.20 7.80 31 19.90 28.00 -29 63.90 68.20 -6
EO 0.00 0.00 -4.60 0.00 -5.30 -0.20 2550
PBT afr EO 10.20 7.80 31 15.30 28.00 -45 58.60 68.00 -14
Tax 1.90 1.50 27 2.60 3.00 -13 6.40 5.10 25
PAT 8.30 6.30 32 12.70 25.00 -49 52.20 62.90 -17
EPS(Rs)* 9.9 7.5 10.0 14.9 17.0 18.8
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Last updated : February 2, 2004
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