Saturday, January 11, 2003
The management of Hughes Software Systems (HSS) gave a guidance
of 10% sequential growth in revenues for the fourth quarter.
However, it was reluctant to talk about the margins and profitability.
It expects its BPO operations to grow rapidly henceforth.
As the BPO operations will initially make losses, the profitability
for the fourth quarter can be affected.
HSS held its conference call on 9 January 2002 to discuss
the results and future business prospects. President and managing
director Arun Kumar gave the highlights for the third quarter.
- Diversification of revenues as per our strategy (HSS
is in the process of
setting up a core team for banking, financial services,
securities and
insurance (BFSI) space)
- Existing relationships continue to drive growth
- Commencement of business process outsourcing (BPO) operations
- Improved margins, cash position and better receivables
management as the
days sales outstanding (DSOs) came down by 22 days during
the quarter
The revenues break up according to products and services
was -
The revenues break up according to geography was –
(including HNS)
The revenues break up according to geography was –
(excluding HNS)
The top 5 customers for HSS contributed 58% of revenues,
down from 70% of revenues. On the other hand, the top 10 customers
contributed 80% (82%) of revenues.
Some of the other highlights of the third quarter were
- Order booking in Products business: $ 3 million. However,
the management
expects the volatility in the products business to continue
in the near
term. Also, it expects further challenges in this business,
as it moves
forward.
- Order booking including HNS at $15.3 million ($18.5 million
in quarter
ended Sep. 2002)
- Order booking exclusing HNS at $11.7 million ($11.1 million
in quarter
ended Sep. 2002)
- Total employee strength of 1,578 with attrition rate
of 12%
BPO operations
BPO business started at its 450 seat Gurgaon facility. It
commenced operations ahead of the schedule, during the quarter.
It had 55 people in BPO during Q3. The company has signed
its first contract with the DirecWay Product Line of Hughes
Network Systems for providing technical help desk. During
this quarter, business process outsourcing (BPO) contributed
1% of
sales at Rs 57 lakh.
Based on acceleration in the business, the company expects
significant growth during the next quarter. The company expects
to ramp up to around 150 employees by the end of Mar. 2003.
This ramp up will be for the same customer (HNS).
Higher tax liability
HSS has a higher tax liability during the third quarter of
this year (22% of PBT) as against 11% of PBT during the corresponding
previous period. This was mainly due to two reasons. First,
10% of software exports are taxable during this year. Secondly,
one of the company's facilities has come in the tax bracket,
which was not the case during the corresponding previous period.
Receivables position
The total receivables position as on 31 December 2002 was
Rs 67 crore. The company has cash in hand of Rs 10.6 crore.
Debtors as per aging profile are
Although HSS has managed to improve its receivables' position
by improving DSOs by 22 days, it has some worries at hand.
One of the immediate worries is that it is turning a $ 10
million (about Rs 48 crore) receivables position into investment
as the customer is not ready to pay the amount.
However, turning it into investment is also subject to customer
approval.
If this position is not converted into investment (i.e. the
customer does not agree to this), then the company may be
required to take this hit on its books, which can adversely
affect its profitability during this year. HSS management
did not give the name of the customer.
The company plans to spend around Rs 9.3 crore mainly for
BPO operations.
Business Outlook
The management expects growth of 10% in revenues during the
next quarter. However, it has not given any indication on
the bottom line. Its strategy of diversification will continue
in future. The company is working currently for its entry
in to the banking, financial services, insurance
(BFSI) space.
Commenting on near term prospects, Kumar said, `Our goal
is to continue with the strategy of diversification of revenues.
We believe that this will help HSS grow its revenues and profitability.`
However, the management expects that the volatility in the
products business will continue in the
near term and there will be challenges ahead as it moves forward.
In the BPO business, the company expects rapid growth in
the next quarter.
Overall, the future strategy of the company would be
- Telecom to remain the majority contributor
- Diversification strategy to continue
- BPO operations to accelerate and growth going to be significant
in this
area
Q3 performance
For the third quarter ended Dec. 2002, HSS posted 5% fall
in sales to Rs 57.1 crore. The travelling costs mounted up
to 10% of sales (from 7.2% of sales in the quarter ended Dec.
2001) and staff costs increasd to 44.3% of sales (40.2%).
As a result, the operating margins (OPM) fell to 25.9%
(31.4%) leading to 21% fall in operating profits (OP) to Rs
14.8 crore. Other Income (OI) was down 37% to Rs 1.9 crore.
Depreciation was down 7% to Rs 5.1 crore.
HSS incurred Rs 7.2 crore on product development and research
and development (R&D). Out of this, it capitalised Rs
3.8 crore during the quarter out of which Rs 0.8 crore was
amortised during the quarter. Thus, the net capitalisation
cost was Rs 3 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.
The profits before tax (PBT) were down 10% to Rs 14.6 crore.
However, the fall would have been higher (29%) at the PBT
level, had the company not changed the policy related to product
development. Provision for taxation was up 78% to Rs 3.2 crore.
PAT was down 21% to Rs 11.4 crore.
HSS was expected to post net profit in the range of Rs 9
crore and Rs 11.5 crore and sales in the range of Rs 54 crore
and Rs 58.5 crore as per a poll of analysts by capitalmarket.com.
On a sequential basis, sales were up 10%. OPM at 25.9% was
better than 19.4% recorded in the quarter ended Sep. 2002.
PAT was up 37% sequentially.
Overall, the nine months performance has been disappointing.
Sales were down 11% to Rs 156.6 crore. OPM was under pressure
at 18.6%, down from 28.3% in the nine months ended Dec. 2001.
OP were down 42% to Rs 29.1 crore. While OI was down 39% to
Rs 6.1 crore, depreciation was down 1% to Rs 15.5 crore. Capitalisation
of product development costs was Rs 10.2 crore (nil). PBT
was down 33% to Rs 29.9 crore. With 18% rise in provision
for taxation to Rs 5.8 crore, the PAT was down 39% to Rs 24.1
crore.
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 September 2002.
On 29 October 2001, General Motors had 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 had signed definitive agreements that provide
for the spin-off of HE from GM and the merger of HE with EchoStar.
However, the EchoStar bid has failed and HSS'
parent continues to be HNS. The management clarified that
the failure of the bid will not affect the company adversely
in future.
Last updated : February 2, 2004
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