Saturday, January 11, 2003
Hughes Software Systems (HSS) met the higher side of the
market expectations for the third quarter ended Dec. 2002
when it posted 5% fall in sales and 21% fall in operating
profits (OP) as well as profits after tax (PAT). During the
quarter, HSS added 7 new customers for products and services
including accounts like Comverse Technologies, Force Computers
and Telekom Malaysia.
However, it failed to impress with its results mainly on
future concerns. Although the management gave a guidance of
10% sequential growth in revenues for the fourth quarter,
it was reluctant to talk about the margins and profitability.
It expects its BPO operations to grow rapidly. As the BPO
operations will initially make losses, the profitability for
the fourth quarter can be affected.
Q3 met expectations
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.
Talking about the company's performance, president &
managing director Arun Kumar said, `Providing consistent and
predictable performance is a high priority for HSS. The results
this quarter are a further indication that our efforts here
are being successful. We are working towards carrying this
trend into the future. The launch of BPO operations ahead
of schedule gives us confidence on our ability to move forward
on new initiatives.`
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.
Nine months performance – Not very encouraging
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.
Exports remain under pressure
For the quarter ended Dec. 2002, the exports contributed
Rs 56.2 crore and witnessed a 5% fall while domestic sales
were Rs 90 lakh only and grew 80%. On a sequential basis,
exports increased 144% and domestic sales fell 67%.
HNS Services recorded huge 42% fall y-o-y
The services to HSS's parent, Hughes Network Systems (HNS),
contributed 28% (Rs 15.99 crore) of the total sales during
the quarter ended Dec. 2002 as against 46% (Rs 27.55 crore)
during the quarter ended Dec. 2001. However, this represented
a fall of 42% y-o-y but a rise of 6% q-o-q. However, the management
claims that the HNS business was stable during the quarter.
'Other Services' perform relatively better
The sales from 'Other Services', i.e. services to customers
other than HNS, were up 41% to Rs 26.27 crore and contributed
46% (31%) during the quarter. Also, this represented a growth
of 7% sequentially. Higher volumes contributed towards this
sequential growth. HSS saw an expansion of its
relationship with NEC, Nokia, and Johnson Controls and bagged
repeat orders from Leapstone, and SS8.
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.
Products business post 4% growth y-o-y
The products business recorded just 4% growth during this
quarter to Rs 14.28 crore, 25% (23%) of the total sales.
BPO - the new mantra
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.
It commenced operations ahead of the schedule, during the
quarter. 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.
Partnerships and product releases
HSS announced the following partnerships and product releases
during the quarter.
- Entered into a partnership with Creative Electronic Systems,
a premier designer and manufacturer of boards, bundled packages
and systems dedicated to data communication and acquisition
in real-time systems.
- Teamed up with eServGlobal Ltd, a worldwide supplier
of telephony network infrastructure and services for deployment
of SIGTRAN offerings, to offer prepaid mobile services over
a Call Agent/Softswitch.
- Partnered with MontaVista Software, Inc., for carrier
grade Linux edition and communication protocol stacks (Wireless/3G/2.5G,
VoIP and SS7) offering best of breed solutions to the OEM
market place.
Business Outlook – Diversification strategy to continue
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.
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 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.
On the current equity share capital of Rs 16.8 crore, the
annualised earning per share works out to Rs 9.6. The HSS
stock closed 13% down at Rs 171 on 10 January 2002, a after
the company announced its results. The current price discounts
the annualised adjusted earnings 17.8 times. Hughes Software
Systems : Segment Analysis : áHughes Software Systems
: Business Mix : Hughes Software Systems : Results :
Last updated : February 2, 2004
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