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Hughes Software: Calling up new profits

Bipin Chandran | October 11, 2003

It has been a stunning comeback by any standards. One year ago Hughes Software Services was down in the dumps. Its key clients, the global telecom giants, were bleeding and most analysts predicted they would take years to recover.

Under the circumstances, the outlook for Hughes Software, which depended heavily on the telecom industry, looked bleak.

Fast forward to this week. Hughes has turned in a sterling performance for the second quarter running.

In the first quarter ended June 30, 2003 Hughes reported a rise in net profits of 245 per cent. It has followed that this quarter with a net profit rise of 106 per cent.

The total income of the company has grown by 61 per cent to Rs 86.7 crore (Rs 867 million) in the second quarter of 2003-04. That's compared to Rs 53.9 crore (Rs 539 million) in 2002-03.

 What has the company done right? The answer is just about everything. "The company has come back to the historic growth rates. Our strategy has worked well," says Arun Kumar, president and managing director, Hughes Software Systems.

The company has, of course, been boosted by the comeback of the telecom industry. All the company's major customers including Nokia, Lucent, Cisco, Alcatel and NEC have increased their business with the company.

Besides, its recently launched business process outsourcing business is showing signs of impressive growth potential, though, it currently has only one customer and around 300 employees.

But it isn't only the telecom comeback that has sent profit levels zooming. The company has played its cards well during the worst of times. It went ahead boldly and acquired Lucent's software development division with 192 employees.

The acquisition earlier this year took place at a time when the global telecom meltdown was still in full swing. The move opened multi -million dollar contract opportunities for the company and gave it new customers and access to additional development capabilities.

Also, it extended its reach into the wireless market significantly. Says Kumar: "Lucent has been a good business for us. It is now one of the largest customers as well."

The result of all these moves is that Hughes is now sitting pretty. It has a $39 million order backlog to be executed over the next two years.

The order backlog has in fact grown from $31 million in the first quarter. In the second quarter Hughes Software has added Rs 20.2 crore (Rs 202 million) to its cash and bank balances and maintained its profit margin.

In other ways too the company has strengthened its position. During the year, the company's dependence on its parent Hughes Network Systems fell to 19 per cent in professional services revenue. That's compared to the earlier 29 per cent in Q2 of the last fiscal.

The BPO business is also growing steadily. Kumar says it is expected to contribute about 8 per cent to the bottomline by 2003-04. Product business grew sequentially by 56 per cent and professional services by 8 per cent.

The company added 91 employees in Q2 and overall utilisation rate was 95 per cent.

What will be the major drivers for the company in the coming months? Hughes Software's chief executive officer Manoranjan Mohapatra believes that the company will be able to add new customers and boost business with existing customers.

"We are looking at scaling our operations based on large accounts acquisition and enhancing the size of our existing relationships. The Lucent win has given us scale, recognition and the potential for future business with Lucent and Lucent customers base. Out BPO and telecom service provider business is also expected to do well," Mohapatra says.

One priority is to get more customers for its BPO business. Currently, the company's only BPO customer is Hughes Network Systems.

"We are keen to have more clients for our BPO operations and are looking at various opportunities," Mohapatra says.

The company expects BPO business to contribute to about 7 per cent to 8 per cent of Hughes Software's revenues in the current financial year.

But is it a smooth ride for the company in the days to come? Will the fluctuating rupee and backlash against outsourcing spoil the party at Hughes?

To contain the rupee fluctuation against the dollar the company is planning to bill its customers in currencies other than dollar. "This has reduced the risk substantially," says Kumar.

The company also faces a problem of how to boost revenue from existing top customers and how to spread its bets. The top seven customers of the company contribute about 90 per cent of its revenue.

Ideally, Hughes would like a more evened out revenue concentration, although the top management seem unworried by this issue.

Then, there's the problem of pricing pressure. Kumar cautions that there are still pricing pressures on the company.

"The pressure on billing has eased. And customer have stopped re-negotiating prices. But there is pricing pressure and we will have to handle it the right way," he says.

Will the company diversify out of telecom now that the profits are pouring in? The answer is that it had drawn up plans for a foray into the banking and financial services sector.

However, it clearly isn't top priority for the time being. Says Kumar: "We have not put diversification on the backburner. But it is on hold as we have enough opportunities in the telecom sector to tap."

There's also an internal problem that will be sorted out in coming months. The company has just changed hands internationally.

The impact of General Motors exiting selling its stake in Hughes Software's parent Hughes Electronics in favour of Rupert Murdoch's News Corp, will at some point trickle down to India.

Says a market analyst: "This is a transition phase for the company. The top management will be pre-occupied in it. They should be managing the company at the same time too. Now, with the company back in the growth pack, it can not afford to go away from its business focus."



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