X

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.
Software products: A tough job - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Mar 10, 2003

    Software products: A tough job

    The Indian software sector still has a long way to go before revenues from software products become a sizeable part of the industry’s revenues. In FY02, the software sector had revenues of US$ 10 bn of this only US$ 400 m was from software products (0.4% of total revenues). However, within this small segment, we have success stories like i-flex solutions that is recognized to be one of the best solutions providers globally.

    i-flex solutions’ flagship product FLEXCUBE has been consistently ranked to be the world's among the best selling universal banking solution in the past by International Banking Systems (IBS), UK – an independent research firm. But this is at one end of the spectrum. At the other end we have companies like VisualSoft and Hughes Software have posted significant decline in revenues from products. The stark difference in the performance could give us some clues to what it takes to be successful in the products business.

    Companies selling software products offer a more attractive investment opportunity as compared to services companies for a number of reasons. The margins are significantly on the higher side due to the fact that effort put in once is sold over and over again. This means that the incremental sales post break-even are added straight to the bottomline. Also, the software companies that have managed to successfully create and sell products are placed higher up the value chain (and therefore could be accorded higher valuations) since, selling products that can run independently require a significant amount of technology related understanding and maturity.

    Products: Higher margins
      VisualSoft Tech Hughes Soft.
    % Contribution FY01 FY02 FY01 FY02
    Products 47.3% 7.8% 28.0% 23.0%
    Services 52.7% 92.2% 72.0% 77.0%
    OPM 48.9% 28.1% 36.4% 28.4%

    So what is the secret behind i-flex’s success? The company was incorporated as Citicorp Information Technology Industries Limited in 1989. It was only in 1996 that the company’s wholesale banking back office product MicroBanker gained recognition. Infact, FLEXCUBE was only launched in 1998.

    Two things are very apparent from the company’s history. Firstly, it has spent a significant amount of time developing its products. But more importantly, the company’s promoters Citigroup are one of the best when it comes to the banking business. What makes the company’s products so successful is the kind of domain expertise that has gone into creating the product. A probable reasoning is that i-flex was able to bring in best practices in the banking business from its promoter, Citigroup, thus giving its product a cutting edge compared to competition.

    i-flex: Leading the products pack
    (Rs m) 2QFY03 3QFY03 Change
    Products      
    Revenues 1,085 1,134 4.5%
    % Contribution 64.7% 65.1% -
    Operating margins 52.3% 49.3% -
    Services      
    Revenues 592 607 2.5%
    % Contribution 35.3% 34.9% -
    Operating margins 17.9% 19.9% -
    Total 1,677 1,740 3.8%

    Another very interesting aspect of the product is that is supports the core banking operations. This it is critical to operations of a bank. If there are technical snags in the product, day to day functioning of the client will be affected. This is a stark comparison when VisualSoft’s products offerings are compared. The company’s product offerings included personal productivity enhancement tools, which are not mission critical and therefore, the spending is discretionary. Also, most of VisualSoft’s products are general in nature and do not require very high technology or domain know-how (these are coding intensive and not domain knowledge intensive). Consequently, the entry barrier is low and the companies like VisualSoft face tough competition and threat of new entrants. However, for products like FLEXCUBE the domain expertise required is significantly higher and therefore, the barrier to entry is significantly high.

    Therefore, for those investors, who are attracted to invest in companies on the back of higher margins in the products business, should also take into considering criticality of the product and the amount of domain expertise required to create the product before making their investment decision. As lessons from the past show that only products that have a significant element of domain expertise and best practices will sell in the long run.

     

     

    Equitymaster requests your view! Post a comment on "Software products: A tough job". 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.

    Ankit Shah's First Five Insider Recommendations (The 5 Minute Wrapup)

    Aug 5, 2017

    How to get exclusive insider recommendations from Ankit Shah.

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

    Jul 14, 2017

    TCS starts FY18 decently despite an adverse currency impact.

    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 Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    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?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    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

    S&P BSE IT


    Aug 22, 2017 (Close)

    COMPARE COMPANY

    MARKET STATS