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Tanla Solutions: Conference call extracts

Sep 7, 2007

We recently had a conference call with management of Tanla Solutions to get an overview of the company’s current performance and future prospects. This gave us an insight into the business model of the company, the environment in which the company operates and the dominance it enjoys in the telecom signaling solutions (TSS) space. About the company
Tanla Solutions, a small sized telecom technology services provider. It started its operations in 2000, focusing on telecom signaling solutions and messaging infrastructure. In 2004, the company acquired a telecom services company in the UK, Techserv Teleservices (UK) Ltd. (now Tanla Solutions (UK) Ltd.) and a software development company, Smartnet Communications Systems (Delhi). In 2005, it acquired Mobizar, an aggregator service provider in the UK. Tanla Solutions provides integrated telecom infrastructure solutions and products. The company has presence in the non-voice segment of the mobile telecom segment. It is provider of integrated telecom infrastructure solutions and products.

Following are the key excerpts of the discussion.
On business model: Tanla Solutions has a very robust business model. It has shifted from licensing agreements to revenue-sharing agreement with network operators. The company has three major lines of business:

  1. Product

  2. Aggregators (single point interface between mobile communication product and service developers one side and network operators on the other)

  3. Offshore

As on 1QFY08, the company generated 76% of its revenues from Aggregators business, 13% from offshore business and remaining 11% from product business. Going forward the company expects the share of revenues from aggregators business to increase, as it will be the core focus area of the company in future. We believe that this is a correct move by the company as there are high entry barriers in aggregators business and Tanla will certainly enjoy its dominance over there.

Tanla will also focus on its offshore business. The business here is not identical to offshore service of IT company but rather involves providing additional offerings to the content providers.

As far as the product segment is concerned, the company expects the share of this segment to come down, as there is no real increase in demand because the market is static. The product business will gain momentum only with growth in wireless products, which the company believes is very difficult to predict.

On operating margins: Tanla had blended operating margins of 46.6% in 1QFY08. The operating margin in aggregators business was 37.5%, 89% in products business and 62.5% in offshore business. The company expects the margins to increase with higher volumes in the non-voice segment driving the growth. Another important factor is that Tanla business model is highly scalable as future growth in not linear to additional capital expenditure, which will boost the operating margins.

Future outlook and competition: Tanla plans to focus to aggregators business and aims to be in top 3 aggregators in the world. Though it doesn’t face competition in India and enjoys its dominance in this sector the fact is it generates 2% of its revenues from Asia Pacific region. Its main source of revenue is the UK market from where it generates 97% of its revenues. In the aggregators space across the world, MBlocks (US based company) has the highest market share of 17% and companies like Sybase are also very active in this field. So the company will face competition in aggregator’s business. Another area of concern is the higher attrition rates. Tanla’s attrition rate is 14%. This is a concern because on a current employee base of 300 people (600 by FY08E) 14% attrition is a worrying factor. Lastly, the industry in which Tanla operates having product patents gives the company an edge over others. Tanla as of now does not have any patents though it plans to have a few of them in near future.

We shall soon put up our detailed research report on the company.

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