Friday, October 11, 2002
After its disastrous performance for the first quarter ended
Jun. 2002, Hughes Software Systems (HSS) has posted a relatively
better show in the second quarter ended Sep. 2002. It improved
its margins due to cost cutting measures and met the market
expectations. However, it is the new capitalisation policy
which helped it post 31% rise in profits before tax (PBT)
during the quarter. The company continued to be cash flow
positive, and there was a significant improvement in client
quality. It 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
10% growth in sales and 89% growth in PAT, it should be noted
that the first quarter performance was very disappointing
for HSS. Hence, the performance for this quarter is more or
less a pull back from the last quarter. Also, the management
still continues to have a negative bias towards the telecom
segment overall as commenting on the future, president and
managing director Arun Kumar said, `We expect continued challenges
in the telecom vertical, especially for our products business.`
Q2 performance – Change in policy helps
For the second quarter ended Sep. 2002, HSS posted 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 quarter ended Sep. 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 margins (OPM) improved
to 19.4% from 17.4% in the corresponding previous period.
This led to a 9% rise in operating profits (OP) to Rs 10.1
crore. But, the other income fell 53% to Rs 1.8 crore, perhaps
mainly due to appreciation of the rupee during the quarter.
This affected the profits before interest, depreciation and
taxation (PBIDT), which were 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 the 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 out of which Rs 0.7 crore was
amortised during the quarter. Thus, the net capitalisation
cost was Rs 3.5 crore during the quarter. The company had
changed the policy from the beginning of this year. HSS incurs
cost to develop standardised software modules for sale. Capitalisation
of software development costs begins upon establishment of
technological feasibility and ends at the time the software
is available for release to customers. Software development
costs are amortised on a product-by-product basis.
This change in policy helped the company to post 31% rise
in PBT to Rs 10.2 crore. Provision for taxation was up 27%
to Rs 1.9 crore. Profits after tax (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.
Sequential performance looks good due to poor Q1 On a quarter
on quarter basis, the sales were up 10%. The 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 HSS
was very disappointing and hence, the performance for this
quarter seems to be better sequentially.
A tough first half
Overall, it has been a tough first half for HSS. For the first
half ended Sep. 2002, HSS posted 15% fall in sales to Rs 99.5
crore. The OPM at 19% was lower than 26.6% recorded during
the corresponding previous period leading to a 39% fall in
OP to Rs 18.9 crore. OI was down 40% to Rs 4.2
crore. Depreciation increased 3% to Rs 10.4 crore. Capitalisation
of product development cost amounted to Rs 7.2 crore as against
nil during the corresponding previous period. PBT fell 29%
to Rs 19.9 crore. The extra-ordinary items (EO) related to
provision for bad and doubtful debts
and amounted to Rs 4.6 crore. Provision for taxation was down
45% to Rs 15.3 crore. PAT was down 49% to Rs 12.7 crore.
The performance of the company for the year ended Mar. 2002
was also far from convincing. While it had revised the guidance
lower mid-way through the last year, it was not able to meet
that lowered guidance for the year. It had posted 18% rise
to Rs 234.9 crore in sales for the year ended Mar.
2002. Its OPM was down to 30.6% from 36.3% during the year
ended Mar. 2001 leading to a flat OP of Rs 71.8 crore. With
20% rise to Rs 13.2 crore in OI and 42% rise to Rs 21.1 crore
in depreciation, the PBT was 6% lower at Rs 63.9 crore. With
an EO of Rs 5.3 crore and 25% increase to Rs 6.4 crore in
provision for taxation, the PAT was 17% down at Rs 52.2 crore.
Exports remain under pressure
For the quarter ended Sep. 2002, the exports contributed Rs
49.4 crore and witnessed a 7% fall while domestic sales were
Rs 2.7 crore and grew 800%. On a sequential basis, exports
increased 8% and domestic sales increased 69%.
For FY 2001-02, the exports were Rs 231.7 crore and domestic
sales were Rs 3.2 crore.
HNS Services recorded a 3% fall y-o-y
The services to HSS's parent, Hughes Network Systems (HNS),
contributed 29% (Rs 15.11 crore) of the total sales during
the quarter ended Sep. 2002 as against 46% (Rs 24.66 crore)
during the quarter ended Sep. 2001. However, this represented
a fall of 39% YoY but a rise of 3% q-o-q.
For the financial year ended Mar. 2002, sales from HNS services
had contributed 42% (Rs 98.66 crore) as against 36% (Rs 71.46
crore) during the year ended Mar. 2001.
'Other Services' perform relatively better 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 stabilized and with its entry in
the telecom service provider (TSP) space, this part of the
revenue stream should witness a good growth during this year.
The management claims that 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 & Nokia and bagged repeat orders from JCI, SS8
and Leapstone.
For the year ended Mar. 2002, sales from 'Other Services'
had increased 15% to Rs 82.22 crore and contributed 35%, almost
the same as that during the corresponding previous period.
Products business post a good show
The products business had witnessed a sequential fall during
the quarter ended Jun. 2002. It has performed relatively well
during this quarter with 79% rise in sales to Rs 12.5 crore,
24% (13%) of the total sales. This also represents 6% rise
in sales sequentially. The sequential growth was on account
of closure of certain deals, which spilled over from the previous
quarter ended Jun. 2002.
Notably, HSS added a total of 13 new customers during the
quarter out of which 11 new customers were for Products. Named
accounts like Acterna, ETRI, Innoace, Intracom, Laboratory
for Technical Services and Spirent were added to the customer
list.
For the year ended Mar. 2002, sales from Products fell 3%
to Rs 54.03 crore and contributed 23% of sales as against
28% contribution during the corresponding previous period.
Partnerships and Product releases continue
HSS announced the following partnerships and product releases
during the quarter.
- Adax and HSS announced a pre-integrated solution that
is crucial to infrastructure developers, who are suffering
pressures to roll out new GPRS/UMTS networks, services and
revenue streams.
- Bharti Telesoft, announced that it had achieved significant
customer wins in Sri Lanka and India for its innovative
solutions that result in dramatic cost savings and convenience
benefits to roaming cellular subscribers. These solutions
are based on stacks developed by HSS.
- HSS announced its support for the Intel« Internet
Exchange Architecture
(Intel« IXA) Developer Network.
- HSS announced the selection of HSS' SIP User Agent Toolkit
by NTT COMWARE CORPORATION for building Scalable IP Contact
Centers.
- HSS announced the forthcoming availability of an integrated
Media Gateway solution for carrier class and enterprise
applications designed for operation on Motorola's StarCore-based
Digital Signal Processors (DSP).
- ECI Telecom - NGTS Ltd., an ECI Telecom Company, and
HSS announced that they have tested and jointly demonstrated
full interoperability between HSS' Softswitch and ECI-NGTS
I-Gate 4000 Media Gateway. This achievement offers combined
VoIP vertical solution for new
communication services.
Business Outlook for FY 2002-03 remains difficult
Talking about the HSS' near term prospects, Kumar said, `We
have already implemented several measures to diversify revenues
and have cost structure more commensurate with revenues. Our
strategy to aggressively grow existing relationships in the
OEM / TSP segments is showing progress. We expect that the
HSS strategy of diversifying in to new verticals will show
the desired results in the medium to long term. The broadened
offerings will help HSS de-risk its business and reduce dependence
on the telecom vertical.`
Signs first contract for BPO
In order to further de-risk its business and create more new
opportunities, HSS had decided to enter into the business
process outsourcing (BPO) segment. This was to be started
as an independent operation and Aadesh Goyal, HSS Vice President
(HR, Corporate Communications & IT) was to head the BPO
division.
The company claims that it is progressing as per plan in
its foray into the BPO/IT Enabled Services business. The company
has signed its first contract with the DirecWay Product Line
of Hughes Network Systems for providing technical help desk.
It incurred Rs 3 crore towards the BPO initiatives
during this quarter as well as half year ended Sep. 2002.
Earlier, HSS had informed that it expects to be able to recognize
its first revenues from BPO in the fourth quarter of the current
financial year.
Valuation
HSS is a subsidiary of HNS, formerly a unit of Hughes Electronics
Corporation (HE). HNS is a networking company, dedicated to
providing products and services to build and operate digital
communication networks worldwide. HNS is the world leader
in VSAT-based networks. HE is a world leader in the design,
manufacture and marketing of advanced electronic systems.
It was a wholly owned subsidiary of General Motors Corporation,
US. HNS-India Inc is the principal shareholder in HSS. The
current promoter holding in HSS is 55.57%, the same as that
on 30 June 2002.
On 29 October 2001, General Motors entered into an agreement
to sell HE to EchoStar Communications Corp for $25.8 billion
in cash and shares. General Motors and HE together with EchoStar
Communications signed definitive agreements that provide for
the spin-off of HE from GM and the merger of HE with EchoStar.
On the current equity share capital of Rs 16.8 crore, the
adjusted earning per share works out to Rs 10 on an annulised
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.
The current price discounts the annualised adjusted earnings
15.3 times. Hughes Software Systems : Results : PBT boosted
by change in policy related to capitalisation of product development
costs Hughes Software Systems : Business Mix : Products contribute
higher at the expense of HNS services Hughes Software Systems
: Segment Analysis : HNS Services witness 39% fall y-o-y
Last updated : February 2, 2004
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