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Hughes Software: Riding on convergence boom - Views on News from Equitymaster
 
 
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  • 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.

     

     

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