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VisualSoft: Need of an USP - Views on News from Equitymaster
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  • Aug 8, 2001

    VisualSoft: Need of an USP

    VisualSoft made a dismal start to the year with a sequential drop (QoQ) of about 57% in product sales. The contribution of products to the total revenues in the 1QFY02 came down to 19%, compared to 47% in FY01. VisualSoft’s success on the bourses was attributed to the blazing topline growth, the company had shown over the past few years and also the company’s high operating margins (50% plus in some quarters) due to the 50:50 revenue mix of products and services. However, with the US economic slowdown the company’s product sales have suffered and these have changed the financials of the company drastically. The operating margins have almost down to the industry average of 33%.

    Amongst the products that took a hit, the worst hit was star product of the company, VisualSoft WebProject that contributes to more than 50% of the product sales. The other products COM/DCOM components and Java beans too witnessed similar dip in sales. The company could be facing problem due to two factors. The COM/DCOM components and Java beans are plug in software programs that satisfy various functionalities and are integrated as a part of larger software. Basically, these are small programs that are written according to standards and therefore offer ease of integration and re-usability. However, these programs may be very general in nature and do not require very high technology or domain know-how (these are coding intensive and not domain knowledge intensive). Consequently, the entry barrier is low and the companies like VisualSoft face tough competition. Secondly, due to the fact that the company is yet to create a strong brand, sales are sliding. VisualSoft’s earlier success with the products could be attributed to the pricing power the Indian software companies have in the International markets. However, in the difficult times this does not seem to be good enough for the company to maintain stability in revenues.

    (Rs m) 4QFY01 Contribution
    to revenues
    1QFY02 Contribution
    to revenues
    COM/DCOM Components 32.7 23.2% 14.1 25.8% -56.9%
    Java Beans 27.9 19.8% 11.7 21.4% -58.1%
    VisualSoft WebProject 78.9 56.0% 28.9 52.8% -63.4%
    VisualeMART 1.3 0.9% Nil -  
    VisualSoft Media Kit Nil - Nil -  
    Others Nil - Nil -  
    Total 140.8 100.0% 54.7 100.0% -61.2%

    On the services front, the company managed to post a 7% growth QoQ. Onsite services contributed 40% to the total revenues from services. Of the onsite revenues, almost 27% of the revenues were from product related services. Therefore, of the total revenues from services, about 11% comes from product related services, which might be affected further if the products sales do not pick up. VisualSoft now provides services to 39 clients and managed to add 6 new clients during 1QFY02. Amongst the services, its offerings in the space of Internet technologies have shown a 4% growth. The positive news is that the systems integration area has shown a significant 113% growth. The growth is positive due to the fact that services in this area will see an increased demand even in the tough market environments.

    Another concern with the company is its receivables position. 46% of the total receivables of the company have debtor’s days in the range of 90 to 180. This is significantly high compared to top rung software companies. The higher debtor days are on account of product sales. 70% of the company’s receivable from product sales are in this range (23% for the services business). This indicates that the bargaining power of the customers is certainly greater with VisualSoft. This is one area that the company needs to address very actively.

    VisualSoft’s disappointing performance along with others in the software sectors brings out an interesting case study for investors. Most of the second rung software companies have managed to show amazing growth rates in the past due to their pricing power. But more than the growth rates, what investors need to look at is how technology intensive the company’s offerings are, as this ultimately provides the cutting edge to the company. In a boom time all companies grow. However, in a down turn only those with better and smarter services offerings manage to hold their own. Some of the software companies have concentrated on building a very strong brand that has compensated for the fact that they are slightly less technology focused than others.

    Unfortunately, the second rung software companies were on their growth path when an unprecedented event in their history caught up with them - the US economic slowdown. These companies are struggling very hard to get their act together. For VisualSoft specifically, the company’s product sales are unlikely to pick up in the near future (based on the past two quarter performance). Therefore, the only alternative left with the company is to consolidate the services business and keep the revenues coming in. But as these might not grow at rates seen as before, the company’s valuations are likely to remain range bound. At the current market price of Rs 96, the stock is trading at a P/E multiple of 5 times it 1QFY02 annualised earnings.



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