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Software: i-flex Vs Misys - Views on News from Equitymaster
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Software: i-flex Vs Misys
Jun 6, 2005

i-flex solutions (i-flex) is India’s premier software products company. It provides software products and solutions to the global financial services industry. i-flex is one of the few software companies in India that earn a major proportion of revenues from software products (53% in FY05). Other companies like Infosys and Geometric also have their own products, but they do not form a major portion of their revenues. In this article, we attempt to analyse how i-flex compares with its major international peer – Misys. Misys is a London-based company operating in the banking software products space like i-flex. However, it also serves the healthcare sector in the US, apart from the general insurance segment in the UK. The company also operates in the BPO space through a wholly owned subsidiary, Sesame.

How do the two compare?

In terms of revenues, there is a considerable gap between the two companies. Misys is an over US$ 1.6 bn giant, in existence since 1979. The company divides its revenues into three major divisions – Banking and Securities, Healthcare and Financial services. For the purpose of comparison, we take the Banking and Securities (B&S) division of Misys (49% of company’s total revenues) and compare it with i-flex’s products business (53% of company’s total revenues).

Smaller in size, but bigger in performance!
(US$ m) FY02* FY03* FY04* CAGR
  i-flex Misys i-flex Misys i-flex Misys i-flex Misys
Net sales** 53 552 79 506 105 437 40.4% -11.0%
Operating profit/(loss)** 24 70 38 80 46 49 37.1% -16.4%
Operating margin** 45.5% 12.7% 47.7% 15.7% 43.4% 11.2%    
Profit after tax*** 24 39 35 83 39 43 27.4% 5.4%
Net profit margin*** 27.4% 2.1% 27.8% 4.5% 22.7% 2.6%    
Employee costs as a % of sales*** 27.3% 30.6% 30.7% 30.1% 39.9% 30.1%    
* The fiscal year ends on March 31 for i-flex and on May 31 for Misys.
** These figures are for Misys' Banking and Securities division and i-flex's products business.
*** These figures for Misys and i-flex are for the entire company, as they are not given for separate divisions.

As we said above, the gap between the two companies is quite substantial. i-flex’s products business revenues are less than one-fourth the size of Misys’ B&S division, as per FY04 figures. However, as can be very clearly seen from the table, the gap has reduced considerably over the years. In FY02, Misys’ B&S division was over ten times the size of i-flex’s products business. This has come down to around 4.2 times in FY04. As far as the entire company is concerned, in FY02, Misys was nearly 12 times the size of i-flex and that has been reduced to a little over five times in FY04. The explanation for this can be seen from the way sales have grown for the two companies over the years. Misys has, in fact, seen its sales being whittled down due to a sluggish environment for IT spending. This can also be observed in the league table rankings of IBS, a research firm on the global banking software market. In 2003, Misys’ wholesale banking suite, OPICS, was ranked among the top 10 selling banking softwares globally. In 2004, however, it has moved out of the top 10. The sales of its B&S division have fallen at a CAGR of 11% during FY02-FY04.

i-flex, on the other hand, has grown its revenues at a scorching CAGR of 40% during the period under comparison. As regards operating margins, quite clearly, i-flex comes out the winner on this count. In fact, even other competitors like Temenos earn operating margins of around 15%, while i-flex enjoys margins of over 40%, anywhere between three to four times those of Misys. The company’s products business margins are nearly 4 times the margins enjoyed by Misys in FY04. Such a big gap in margins clearly shows the cost advantages enjoyed by Indian software companies.

When it comes to net profit margins, i-flex is the run-away winner. Misys earns meager net margins ranging between 2%-5% (for the full entity). i-flex, on the other hand, enjoys net margins of well over 20% (full entity). A number of discussions and debates have been held regarding the reasons as to why India has been such a major beneficiary of the offshore outsourcing story. Rhetoric apart, the answer is clearly reflected in the numbers – Indian companies’ margins are far superior to their MNC counter parts, be it Temenos, BearingPoint or Misys.

Even in terms of productivity per employee, i-flex has been catching up with Misys. The differential in revenues per employee was about 157% in favour of Misys in FY02 – this has reduced to 80% in FY04. In fact, this has been the case, despite Misys actually reducing the headcount of its B&S division, while i-flex has increased its headcount in its products business at a CAGR of 12% during the period under comparison. The obvious answer to this is clearly reflected in the sales growth of the two companies. Misys has not been able to leverage on its scale and size to win more deals and de-risk its business model effectively by earning a greater proportion of its revenues from maintenance contracts, adversely affecting the company’s financial performance during the global slowdown in FY02. Although the proportion of maintenance revenues increased in FY04 compared to the previous year for the B&S division, on an absolute basis, revenues from these services declined by about 5%.

Employee productivity: Catching up, slowly but surely!
  FY02 FY03 FY04
  i-flex Misys i-flex Misys i-flex Misys
Average employees* 818 3,071 858 2,828 1,023 2,629
Revenues per employee (US$ m)* 0.07 0.18 0.09 0.18 0.10 0.17
* These figures are for Misys’ Banking and Securities division and i-flex's products business.


As regards valuations, at the current market price of Rs 732, i-flex’s stock trades at a price to earnings multiple of 15.8 times our expected FY07 earnings. Misys, on the other hand, trades at a price to earnings multiple of 45.0 times its FY04 earnings. As can be clearly seen, i-flex scores over its much larger competitor, Misys, on virtually all parameters of comparison. Going forward, the outlook appears bright for i-flex, given increasing market acceptance of packaged software, de-risking of its business model by increasing the proportion of maintenance revenues, a fast-growing services business, initiatives taken in the insurance space and the increasing brand visibility of Flexcube, given recent order wins from tier-I financial institutions and tank size touching US$ 50 m.

However, one must also take into account the possibility of margin pressure due to the fast-growing services business, for which margins are considerably lower than that of the products business. Employee costs will be difficult to contain, for two reasons. Firstly, due to increasing requirements of scaling up in order to meet the strong business momentum and secondly, on account of raising compensation packages and providing other incentives to employees in order to retain them in times of intense competition for scarce talent.

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