"Our competitive edge is our domain expertise in next generation networks, our technology, the Hughes brand and excellent manpower. "

Mr. Arun Kumar, President and Managing Director of Hughes Software Systems (HSS), graduated in electrical engineering from the Indian Institute of Technology (IIT), Kanpur, and went on to do a master's degree in computer science. Prior to the current assignment, he was the head of HNS’ (Hughes Networks Systems) West Coast software operation in the US. HNS is Hughes Software System’s (HSS) parent organisation. As an engineer, Mr. Kumar is credited with pioneering work in the design and development of VSAT technology and developing a digital standard for Hughes entry into the cellular business.

At the HSS’s helm since 1995, Mr. Kumar has been responsible for expanding HSS' business to newer markets and leading it into the business of products. In an interview with Equitymaster.com, Mr. Kumar talks about the future of the software sector, the challenges it faces and HSS strategy for growth in the future.

EQM: How do you see the software sector evolving in the future? What kind of services and technologies will dominate the demand environment?

Mr. Kumar: The future of the sector is bright! In addition to the traditional IT services, IT enabled services and the business processes outsourcing (BPO) space are emerging as the ‘new’ growth areas. We see a number of new players marking an early presence and consequently, registering rapid growth.

Two trends seem to be evolving in the demand environment. One is the demand for IT in the new technology areas like Biotechnology and genomics, and second would be the shift towards very large offshore and turnkey projects.

India's offering will spread to cover the full spectrum of technology and services - right from maintenance and design to high-level consultancy. A majority of the players will operate in multiple verticals creating diversity in terms of technology and services offerings.

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EQM: Hughes Software is focused on software and services related to the networking and communications space? How different are the dynamics of this segment in terms of the demand supply equation, pricing pressure, the sensitivity to slowdown in the economy, barriers to entry and competition?

Mr. Kumar: The global economic slowdown has severely impacted the telecom equipment makers, our primary market segment. Over the last two years, this segment had built up excess capacity fuelled by peak dotcom boom demand and sizeable IT investments in productivity enhancement post Y2K, leading to short term pricing pressure.

However, we do expect to see a strong resurgence in this sector in the future. Communications, the exchange of data, voice and images, is core to all business and our lives and I'm confident that this demand will keep growing.

The barriers of entry to the communications software sector is high since, most of the work is complex and requires a significant depth and breadth of knowledge. Consequently, take longer time to build.

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EQM: What do you feel about software services companies adding BPO (business process outsourcing) to their portfolio? Do you think that there is a possibility of creating a sustainable competitive advantage in the IT enabled services segment?

Mr. Kumar: Outsourcing IT enabled services to India has just become the next big trend. With more and more customers seeing value in it, the sector is poised for quick growth. Scalability is the key issue that will determine success in this sector.

For India, to create sustainable competitive advantage in the BPO domain, companies will have to concentrate on the core issues of hiring, training and retention. People are key to this business as is infrastructure in the form of roads, connectivity and power in all cities, especially B and C grade cities.

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EQM: What do you think about competition from countries like China?

Mr. Kumar: As more data starts to emerge it is clear that the threat is larger than anticipated and should be taken seriously. The challenge for India is to be a more favored destination than China. Apart from the international outsourced business, Indian companies also need to look at the domestic IT market as a big potential revenue segment. The domestic market has been one of the key drivers for the success of Chinese companies.

EQM: What are the lessons that the Indian software industry can draw from one of the toughest times it has faced?

Mr. Kumar: The lessons that the Indian software industry can draw from these tough times are that it is time to get back to the fundamentals and watch the cost structures. It is also time to consolidate and focus on core capabilities as buyers are getting more sophisticated and looking for real value.

This is also an opportunity to innovate, find new markets and niches through an improved sales and marketing strategy.

EQM: Who are Hughes Software’s major competitors? What is Hughes competitive edge over its competitors?

Mr. Kumar: We are competing with different players in different segments. We compete with other Indian software services companies for human capital. For the software services business also, we compete with some IT companies from India. However, as far as the products segment is concerned, our competition mainly stems from companies in Europe, Israel and the US.

Our competitive edge is our domain expertise in next generation communication networks, our technology, the Hughes brand, our strong processes and excellent manpower.

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EQM: What is Hughes Software’s strategy going forward? What are the major areas that the company is looking at for growth? How do you see the revenues mix emerging three years down the line?

Mr. Kumar: Hughes Software has maintained its focus on a prudent mix of products and services. In the services business, the focus will be on higher quality client acquisition, leading to larger annuity business. The new areas for us in the services and products markets are services for the telecom service providers (TSPs). We will leverage our network management experience for offering billing and OSS products. In the services segment we plan to offer system integration services to the ASPAC region. We are also looking for outsourcing projects from large telcos in the US and Europe.

The revenue mix for the company three years down the line is likely to be 50-60% from the OEM focus business, 25-30% from the TSP business and the rest of the revenues from our new initiatives.

EQM: Is there is any difference between the services Hughes Software offers to HNS and its non-HNS clients? Revenues from Non HNS clients have been declining consecutively for the past two quarters, how do you see the numbers moving in the future?

Mr. Kumar: The nature of services for both is similar. In the first nine months we have seen a 32% growth year on year from the non-HNS services business.

The telecom sector has seen challenging times in the last 6 months. The accounts have not grown as anticipated and this has led to a downturn. Thus, we have had to revise our outlook. We expect an upturn with a recovery in the next 3-4 quarters. We have also diversified and de-risked our business to reduce dependence on telco OEM’s.

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EQM: Can you elaborate on the products that Hughes Software offers? How difficult is to create these products? How many other companies offer these products? Who are the clients? Why is it that these products show a fall in sales of 60% in one quarter and a 97% jump in the next?

Mr. Kumar: Hughes Software Systems has a portfolio of products that are key enablers for technologies that make convergence possible, namely Voice over Packet (VoP) and Mobile Data (GPRS & UMTS). For the Voice over Packet domain our product portfolio is composed of various application-ready frameworks, toolkits and protocol stacks. All our products and solutions are high performance, interoperable and versatile.

Our competition is different for each product with niche companies in the US and Israel. The clients are the telecom OEMs. The volatility in revenues is partly due to the small numbers for the products business. Hence, even a few customers can cause huge swings. This will come down as the product business grows in size over the next few years. At the peak of the slowdown large companies like Cisco, Motorola, Nortel have revised their guidance a number of times leading to a revised market outlook. At HSS we are aiming to bring more predictability into the products business.

EQM: How are the revenues broken up geographically? Do you see that changing in the near future?

Mr. Kumar: Traditionally, about 70% our revenues have come in from the USA with Europe contributing about 20% and the balance from rest of the world. We expect the geographic mix to change in the future with an increased contribution from the ASPAC region and Europe.

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EQM: What are the R&D initiatives at Hughes Software?

Mr. Kumar: HSS has a very strong R&D focus and inspite of the slowdown we have not cut down on our R&D spend. Our focus areas are the next generation networks and wireless- where we are working on tracking new standards and prototyping.

EQM: Tell us about the three persons who have influenced you the most?

Mr. Kumar: I think my father has been the biggest influence in my life.

EQM: What takes up your time outside work?

Mr. Kumar: I enjoy reading business books. I enjoy playing golf and travelling with my family.

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Last updated : February 2, 2004