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VisualSoft: Product blues? - Views on News from Equitymaster
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  • Mar 23, 2001

    VisualSoft: Product blues?

    VisualSoft had the distinction of being one of the most successful product companies in the Indian software sector at least till yesterday when it issued profit warnings. According to the company the economic slowdown in the US had negatively impacted the demand for its product sales that include components, Java beans and enterprise products, such as, Webproject, Webdev etc., and the realisations are to be significantly lower than the company’s expectations.

    The company had earlier projected a growth of more than 100% for FY01 (YoY). After the impact of the slowdown the company now expects to clock a growth of about 90%. The products contributed to 52% of its revenues in 3QFY01.

    VisualSoft’s products in the application development tools segment have been hit due to deferment of investment in new technology and applications. A survey by CIO.com, 72% of corporate IT professionals said that they practiced a “wait to acquire new technology until it proves its worth and stability" approach. Only 11% were in favour of ordering new technology on or before announcement date and have it installed as soon as possible. With the marco economic environment grim companies would not be willing to go in for new technologies.

    According to the company, the hardest hit product segment was that of Java components. This was due to the demand for Java applications slackening. One of the reasons could be restrain in expenditure globally. On the other hand with the introduction of .NET, Microsoft has made a grand entry into the traditional Java domain – Internet infrastructure. It’s very interesting to note that products in the area of COM/DCOM components (that are based on Microsoft developed standards) saw a jump of 75% in 3QFY01compared to 2QFY01.

    Growth (QoQ) 1QFY01 2QFY01 3QFY01 4QFY01E
    COM/DCOM Components 14% -10% 74% -35%
    Java Beans 36% 14% 44% -60%
    VisualSoft WebProject 31% -7% 33% -50%
    VisualeMART - 331% 66% -10%
    Visual MediaKit - - 59% -10%
    Total 22% 2% 46% -46%

    The impact will not only be limited to the topline but be reflected in the operating margins too as VisualSoft might have to step up its marketing expenditure to counter the fall in demand. The company is expecting a 90% plus growth for FY01. Considering a growth rate of 90% YoY would mean that the earnings in 4QFY01 would drop by 30% compared to 3QFY01. The services group in 3QFY01 grew at 27% QoQ while the growth for the products group was 45%. If the services grows by a prudent 10% QoQ in 4QFY01 the sequential fall in product sales could be about (46%).

    This would significantly change the business mix for the company. 66% in favour of projects and 44% for products. As the margin in the products business are higher than that of the project business overall operating margins would also be impacted.

    Currently the stock is trading at a P/E of 11 times its 9mFY01 earnings. The company has been hit due to the fact that it has a lesser known brand and due to the US slowdown it might find it difficult to find new business as customers would be more than cautious with their spending. However, the positives for company are that it has in the past shown a strong ability to grow and maintain high operating margins. Therefore, once the markets abroad pick up the things might brighten.



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