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Software: Hughes Vs RadiSys - Views on News from Equitymaster
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  • Jul 15, 2003

    Software: Hughes Vs RadiSys

    Telecom software service providers are faced with a difficult situation of significant reduction in R&D and expansion plans by clients. With most of the global telecom majors in the red, there seems to be no respite for software companies providing solutions to this industry. The overall telecom picture is yet to show some clarity. In the midst of this turmoil, there are two companies – one Indian and one American, which have seen their fortunes plunge, however, by differing variations. In this article, we try to compare these two companies – Hughes Software Systems India (HSS) and RadiSys (US).

    Hughes Software
    HSS provides services in the areas of telecom infrastructure (like Cisco and Lucent), communication service provider (Bharti, AT&T and Vodafone) and BPO. The company has traditionally provided services to equipment manufacturers like Cisco and Lucent. However, the severe downturn in the industry has forced HSS to broaden its service portfolio. HSS is now eyeing telecom service providers, business process outsourcing, financial services industry and maintenance and support for growth. The company recently won a contract from Lucent to provide software development and maintenance support for selected wireless products.

    RadiSys, on the other hand, is a leading global provider of embedded systems (in simple terms, integration of software and hardware). RadiSys designs and manufactures embedded systems that are used in telecommunication equipments, medical devices and robotics applications. Even RadiSys is faced with similar situation like HSS with clients rationalizing R&D spending to stay afloat.

    The graphs below signify the pressure that these two companies are facing in the current situation. While pressure on Hughes has resulted in declining revenue and profit margins, the downturn has been more severe for RadiSys, which has seen its revenue growth plunging into the negative territory. However, the company has been able to improve upon its operating margins (though negative), through a slew of rationalizations on R&D, and selling and distribution expenditure fronts.

    But the moot point is, why are telecom software service providers the worst hit in a downturn? A brief overview of the global telecom sector is of significance. The over ambitious telecom service providers in both US and Europe went on an acquisition spree in FY99-FY02 (this also includes extensive bidding for 3-G licenses). As a result, financials are stretched. While companies are facing pressure on the debt side, excess capacity situation has had a severe impact on revenues as well. The combination of both these factors has forced telecom service providers and telecom equipment manufacturers (who supply equipment to service providers) to cut R&D spend. This is one of the key reasons why telecom software service providers like Hughes Software and RadiSys have been the worst hit as compared to Infosys.

    A look at the charts below signifies the fact that Hughes even as it has a greater presence in the North American region, has a more diversified presence relative to RadiSys. And this is one of the reasons why the former has been able to protect its revenues better than the latter.

    These two companies, however, have found out a way of dealing with tough times. They have been working in partnership in developing high-end solutions in the telecom sphere. One such deal was the integration of HSS’ voice over internet protocol (VoIP) software solution with RadiSys telecom gateways. Now with the pressure on these companies showing, they are likely to be in win-win situations when more of such deals happen. Also, working through partnerships will enable them to benefit from the synergies that such partnerships hold.

    Key Ratios…
      Hughes RadiSys
    Revenue/ employee (US$ m) 0.03 0.40
    RoE 13.6% -2.2%
    RoA 8.3% -1.2%

    A look at the table above shows that while RadiSys has been able to generate higher revenue per employee, Hughes has outperformed it on returns to its shareholders. The higher revenue per employee for RadiSys is due to the fact that it has gained from a number of Intellectual Property Rights (IPRs) that have helped its products gain a competitive edge over its peers.

    Hughes: Increasing R&D initiative…
    R&D Expenses
    (as % of Revenues)
    FY01 FY02
    RadiSys 15.5% 15.1%
    Hughes 10.1% 14.2%

    For Hughes, investment in R&D initiative is on a rise. The company has a number of new products in the development stage. If it succeeds and results in a creation of an IPR, revenues can be maximized, as evident from RadiSys’ numbers. It has also filed for patents and has been successful in creating a large number of Intellectual Property Rights (IPRs). With technology changing rapidly, Hughes would have to invest in R&D on a continuous basis for developing new products and improve upon some of the already existing ones.

    Considering the business structure and the portfolio offerings of the two companies, they are in for a higher growth going forward. But this is highly dependent on the global economic recovery, which shows no significant signs of improvement. Though the potential is promising, the risk profile of HSS is significantly higher due to poor earnings visibility. Retail investors have to keep this factor in mind before taking investment decisions.



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