Geometric: Soft on software

On the face of it, Geometric has made a weak start to the fiscal FY02. Compared to the last quarter of FY01 when it posted a sequential (Quarter on Quarter - QoQ) topline growth of 44%, it has posted a 13% drop in revenues for the 1QFY02. On a YoY (Year on Year) basis the company has shown a growth in topline of 60%. The net profit figure for the company has declined by 67% sequentially and 10% on a YoY basis.

The operating margins for the company dipped sharply, from 41.8% in 4QFY01 to 19.3% in 1QFY02. This is due the fact that the expenditure of the company grew by 20%, while the topline headed south. The growth in expenditure was largely due to the staff costs, which escalated by 35% compared to 4QFY01. As a result, the staff costs jumped to 40% of revenues compared to 26% in the previous quarter. The reason for this rise in staff costs is that the company recruited 40 people in the quarter and also, there was a revision in pay structure. Other expenses heads like traveling grew by 21%. As a result the company’s operating margin dipped. However, the marketing costs have declined compared to the 4QFY01.

However, if we look deeper into the numbers, the performance is not exactly disappointing.

The dip in operating margins could be due to a 65% drop in software (components and products) sales. However, in 4QFY01 the company had realized Rs 46 m due to a one-time sale of technology to Spatial Corp. Excluding this figure the software sales were down by 25% for the company. As the contribution of software sales was just 22% to the sales, the operating margins were lower. On the projects front, Geometric has shown a strong growth in projects sales (up 45% sequentially).

The company is trying to boost the topline growth by venturing into new areas like collaborative engineering and information management, which are more inclined towards projects. The information management business unit has bagged projects for software development, implementation and integration. It has joined hands with MatrixOne to be a global alliance partner and won its first major order for integrating the software for an industry major during the quarter.

The company’s geometry business unit (more inclined towards software components and products) added five new customers including three industrial customers. The addition of industrial customers has been identified as a key element in Geometric’s strategy to expand its customer base.

Geometric’s past and the current performance continue to haunt its valuations. The stock trades at a P/E multiple of 5 x its annualised 1QFY02 earnings. However, it should be noted that the company is gradually getting its act together and has chosen high growth areas like collaborative engineering and information management. It is in a transition. How well it is able to handle it would largely decide its fate on the bourses.