Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Hughes Software: Riding on convergence boom - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jan 1, 2001

    Hughes Software: Riding on convergence boom

    Telecom industry worldwide is growing by leaps and bound. The industry is not only growing but is also changing rapidly. Through the power of communication software, the voice network is now able to carry data and to add to it, is the spectacular growth of the Internet. With newer switching technologies the industry is experiencing new found convergence.

    The communication software industry globally is expected to grow at a compounded annual growth rate of 27% in the next three years. The industry is thus facing explosion of demand for the need to integrate today’s traditional networks into the next generation networks. Also wireless connectivity has become a major component of the communication industry, leading a marked shift towards mobility, changing the way the current business is done. This explanation boils down to the conclusion that the communication industry is throwing up great opportunities for the players catering to the communication software segment. Hughes Software being a numero uno software player in this segment is likely to benefit with focus on the emerging technologies.

    Hughes has a judicious mix of both products and services. The company offers both custom software development services and software products covering a wide spectrum of communication technologies. The company, which was formed with a view to cater to its parent company Hughes Network Services (HNS) has shown a marked improvement in its revenue mix over the years. The revenues from HNS declined to 37% in the first half of FY00 from 84% in FY97. Since, Hughes decided to tap the potential of communication market with its branded products and services. The company’s parent, HNS possesses strong experience in voice over Internet space (VOIP), wireless application protocol and mobile integration.

    Non-HNS services on the rise
    Particulars FY97 FY99* FY00 FY01E
    HNS Services 84.0% 75.0% 60.0% 37.0%
    Other Serivces 11.0% 15.0% 26.0% 34.0%
    Products 5.0% 10.0% 14.0% 29.0%
    Total 100.0% 100.0% 100.0% 100.0%
    *15 months results

    Interestingly, revenues from products, over the years increased, as more products tasted success. Given the parent’s commitment and increasing standardization of services, the share of revenues from products is expected to improve in the next three years to around 35%-38%. Some of the company’s products include IntelliQuick, ProtoQuick, MultiQuick, RightServe and SwiftBill. Thus, the company is not dependent on any single product and has successfully diversified its portfolio. What make Hughes different from other product companies are its slew of telecommunication protocols and other offerings (implementing wireless data networks and network management).

    Although, there are very few Indian companies who concentrate on telecom product business, International markets for the industry is not free from competition with large players like Alcatel, Airtel, Cisco, Lucent Technologies and Sun. These companies are also Hughes’ clients who are acquiring communication software companies and developing in house telecom protocols. The impact of this could be reduced share of revenues for Hughes from these companies. However, compared to global players who are pure product companies, Hughes is different with its ability to offer both services and products. As a result these global telecom equipment vendors require Hughes’ services to integrate the product into their networks.

    Another area of concern for the company is that its top five customers contribute a high 18% of total revenues (26% of non-HNS revenues). Hughes’ business is likely to get hit severely if it loses any of its major clients. Thus the company needs to grow its current client base in order to minimize risk from high client concentration.

    The operating margins of the company declined sharply in the first half of the current year as a result of increased R&D expenditure (12% of sales in 1HFY01). Further, as the company moved its focus towards increasing revenues from non-HNS services, marketing spend of the company moved up substantially, leading to a pressure on operating margins. However, Hughes’ large investment in R&D, to develop new protocols and telecom components is expected to benefit the company in the long run. The very fact that Hughes is a technology company requires it to continuously develop new products and solutions due to the high rate of technological obsolescence. Also, being into product business the company needs to continuously spend on marketing, as the success of any product depends upon the marketing abilities of the company.

    R&D takes toll
    Particulars FY97 FY99 FY00 1HFY01
    Operating margins 38.5% 38.5% 38.4% 32.4%
    R&D as a % of sales 12.0% 10.8% 12.6% 12.0%

    Apart from the software services and products areas, Hughes might also benefit from strong plans of Hughes Telecom to build telecom infrastructure. Hughes is expected to achieve better growth performance once the investments of its IPO fund are deployed efficiently in a phased manner. Also the company is expanding into Internet and e-commerce areas which would provide a good vertical domain de-risking in time to come.

    The convergence taking place in the telecommunication and IT sector will fuel the growth in the communication software and product segment. Hughes with the right kind of business model is expected to benefit from the convergence boom. Further, the initiative taken by the company (marketing and R&D) is expected to grow its profits at a compounded annual growth rate (CAGR) of more than 60% in the next three years. The company is all set to capitalize on the opportunity offered by the combination of convergence and mobility.



    Equitymaster requests your view! Post a comment on "Hughes Software: Riding on convergence boom". Click here!


    More Views on News

    Tech Mahindra: Our Revised View (Quarterly Results Update - Detailed)

    Aug 2, 2017

    A better than expected turnaround in performance results in a change in view.

    Wipro: A Decent Start to the Year (Quarterly Results Update - Detailed)

    Jul 27, 2017

    Digital services drive growth for Wipro in 1QFY18.

    Infosys: A Decent Start to FY18 (Quarterly Results Update - Detailed)

    Jul 14, 2017

    Infosys starts FY18 on an encouraging note with a stable performance.

    TCS: Currency Volatility Plays Spoilsport (Quarterly Results Update - Detailed)

    Jul 14, 2017

    TCS starts FY18 decently despite an adverse currency impact.

    HCL Tech: Ends FY17 on Expected Lines (Quarterly Results Update - Detailed)

    Jun 29, 2017

    Volvo partnership caps a good year for HCL Technologies.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    • Track your investment in FLEXTRONICS SOFTWARE with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
    • Add To MyStocks