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Software: Flexcube Vs Globus

Aug 8, 2003

The title of this article might seem surprising at the first glance, but when one considers the importance of these two brands for their respective companies, i-flex and Temenos, doubts are more than cleared. In this article, we try to bring out a comparison between these two leading providers of software solutions to the global banking and financial services industry. i-flex is one Indian company that has brought the ‘Made in India’ tag fame across the globe. Conferred as the largest selling banking software in the world (by International Banking Systems, UK) in 2002, i-flex’s product ‘Flexcube’ has seen global banking entities selecting it as their platform for performing their banking operations. It is to be noted that this recognition from IBS is not new for Flexcube, as it has been consistently ranked among the top selling banking solutions since its launch in 1997. What is more important is the fact that the product has gained global recognition in such a short span of time. In FY03, Flexcube achieved 36 installations, ahead of Temenos’ Globus that got 32. While Temenos is a relatively older player (Globus was launched in 1988) in this industry, i-flex seems to be fast catching up. The table below mentions the top 5 suppliers of banking solutions in 2002, as ranked by IBS.

The top 5...
Product Supplier Installations Live sites
Flexcube i-flex 36 98
Globus Temenos 32 500+
Quantum Sungard 19 55
Olympic ERI Bancaire 14 230+
Equation Misys 10 400+
Source: Temenos

Temenos, headquartered in Geneva, Switzerland, has an established presence as a leader in the banking software industry. The company began its operations in the 1980s, with its flagship product Globus, and now has a new breed of solutions under the brand Temenos T24. In fact, along with i-flex and Misys, only Temenos provides solutions across the entire spectrum of the global banking and financial services industry. This involves solutions for treasury management, securities and capital market, private banking, retail and wholesale banking and risk management.

Disparate operational performance...
US$ m i-flex Temenos*
  FY02 FY03 Change FY02 FY03 Change
Sales 90 134 49.5% 141 113 -19.5%
Expenditure 63 92 44.8% 125 158 25.9%
Operating Profit 26 42 60.9% 16 -44  
Operating Profit Margin (%) 29.4% 31.6%   11.1% -39.1%  
*December ending 2001 and 2002

A glance at the operational performance brings out the stark difference in the way these companies have been affected by the ongoing pressure on the banking and financial services industry. In FY03, while Temenos witnessed its revenues decline and bottomline in the red, i-flex significantly improved its revenues and consequently profitability. More importantly, while rise in selling and marketing expenses pressurized the margins of both the companies, i-flex was able to improve upon the same. Growth in margins for i-flex was mainly due to the growth witnessed by its products business. Interestingly, in FY03, Temenos’ revenues from its products business declined over FY02. Also, its share of revenues from the services segment increased over the same period. This is unlike i-flex, where the products segment has been the key driver for the company’s growth.

i-flex: Growing product(ively)!
(Share of revenues) FY02 FY03 YoY growth
i-flex      
Products 60.0% 63.6% 58.4%
Services 40.0% 36.4% 36.2%
Temenos      
Products 56.6% 49.3% -29.9%
Services 43.4% 50.7% -6.0%

A geographic division of revenues also brings out the reasons for i-flex’s relatively higher growth in the past few years. While i-flex is increasing its revenue share from the US region post Regulation K, Temenos continues to target the European region for its growth. It is to be noted that the relatively higher (than Europe) spending by large banks in the US is likely to see i-flex growing even faster than Temenos going forward. Also, the former stands to gain from increasing use of the ‘pay-by-use’ model that many community banks are following in the US, Latin America and the Caribbean regions. Since, Temenos has a very small share (almost negligible) coming from Americas (North & South America), growth is likely to be unstable, probably moving in line with the instability of economies in the Euro-region.

Particularly for i-flex, the company has outgrown its competitors because of its ability to manage the product lifecycle, i.e., develop better products and upgrade existing ones. Microbanker was the first offering of i-flex, and it has graduated from that product to Flexcube. Also, very recently, the company launched its latest brand of business intelligence solution called Reveleus. Continuous investments in R&D initiatives (around 10%-12% of revenues) has helped i-flex to gain this competitive advantage of product lifecycle management.

Heightened competition from non-banking entities, economic slowdown and decreasing profitability levels has influenced banks to increase their technology spending, thus providing i-flex and Temenos with the opportunity to benefit from it. IT spending, going forward will be directed towards replacing legacy systems (old technology), reducing costs (improving efficiency), and gaining competitive advantage. Moreover, a shift towards external spending rather than internal development and maintenance of solutions, and domain expertise will drive growth for both i-flex and Temenos.

On the valuations front, i-flex is trading at a P/E multiple of 24x its FY03 earnings. Temenos, on the other hand, suffered losses in FY03 and hence, a P/E comparison is not feasible. i-flex’s stock has seen a continuous rally since its initial listing and is nearing its all-time highs. Also, the stock seems expensive (relative to the industry) at the current valuations. Since the company is solely dependent on the performance of the global banking and financial services industry, the risk is on the higher side. However, despite that, the strong business model of the company and the recognition that it has gained globally augurs well for it reaching much higher levels of growth.

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