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VisualSoft: Betting on products - Views on News from Equitymaster
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  • Mar 24, 2001

    VisualSoft: Betting on products

    Rated among top 20 best small companies worldwide by the American financial magazine, Forbes Global, VisualSoft has the distinction of being known as India’s premier software products company. It has successful products in the area of web based project management, e-commerce and software components. Products contribute 51 % to the revenues and the remaining business comes from projects.

    The company was set up in 1995, VisualSoft over the years has proved its ability grow at a very fast pace. The year on year (YoY) growth rate has been more than 100% for the last three years. To top this the company has very strong financials. Due to a higher proportion of products (51%) in the business, operating margin for the first 9 months of FY01 was 52% as compared the average industry rate of 30%. The contribution of products has steadily grown from 34% in FY99 to 51% in 1HFY01. The company plans to maintain this 50:50 revenue mix of products and services in the future too.

    On the demand side market for software products is expected to grow at a CAGR 42% to US$ 19.5 bn by 2008. Some products like COM/DCOM are expected to grow at rates higher than the industry average. To reach to reach out to a wider audience using the low cost model the company is offering its products on rental use through the ASP (application service provider) business model.

    The attrition rates for VisualSoft are quite low at about 5%. This is amongst the lowest in the industry. One of the factors responsible to this figure could be the fact that the number of employees is quite low.

    VisualSoft had shown a strong growth in 3QFY01 of 36% QoQ. While the services segment grew by 27%, the products business of the company had shown a brilliant growth of 46%. The company had projected year on year growth rate for FY01 to be greater than 100%. Then on the 22nd of March the company announced that it had been impacted due to the US economic slowdown and would register a negative sequential growth. VisualSoft derives 66% of its revenues from North America.

    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.

    Products boomerang
    (% growth) 1QFY01 2QFY01 3QFY01 4QFY01E
    COM/DCOM Components 14.3% -10.1% 74.1% -35.0%
    Java Beans 36.1% 13.6% 43.8% -60.0%
    VisualSoft WebProject 31.1% -7.0% 32.6% -50.0%
    VisualeMART - 330.8% 66.1% -10.0%
    Visual MediaKit - - 59.5% -10.0%
    Others - -    
    Total 22.0% 2.1% 45.5% -45.6%

    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% sequentially. 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 %).

    The Product portfolio
    (% of revenues) 1QFY01 2QFY01 3QFY01 9mFY01
    COM/DCOM Components 23.2% 20.4% 24.5% 22.9%
    Java Beans 19.8% 22.0% 21.8% 21.3%
    VisualSoft WebProject 56.0% 51.0% 46.5% 50.7%
    VisualeMART 0.9% 3.9% 4.4% 3.2%
    Visual MediaKit - 2.6% 2.8% 1.9%
    Total 100.0% 100.0% 100.0% 100.0%

    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.

    However, according to the company the revenue from project services is likely to continue steady growth on the from new customers added and greater marketing effort. The Company would continue to work on cutting edge technologies and develop new tools and applications.

    The company has been hit due to the fact that it has lesser-known brands and that the US slowdown it might dry out any new business. 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 IT markets pick up the things might brighten.



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