Fast Forward: Rajiv Mody says Sasken is at an inflexion point, with revenues set to take off on the back of 3G telephony

Measured by the typical it industry yardstick of 40 per cent-plus annual growth in revenues and, in some cases, profits, Sasken Communication Technologies would have serious admission problem. In the 16 years that it has been around, the Bangalore-based firm has managed to grow revenues to just an embarrassing Rs 242 crore. In that time, most other it services companies such as Infosys (1990 revenues: Rs 4.15 crore) have racked up more than a billion dollars (or Rs 4,500 crore) in topline. Neither does Sasken boast of fat profit margins like other players do. In fact, at 10 per cent, it is less than half of what the big guns pull in. Yet, last August, when the company made its maiden IPO, investors demanded eight times the shares on offer. And just a couple of months before that, Canadian telecom giant Nortel and Finnish major Nokia had picked up shares in Sasken. While the company's stock is trading below the list price of Rs 400, it is still a third higher than the offer price of Rs 260. What is it about Sasken that its financials don't quite tell?

For one, that Sasken is not really 16 years old, but five, which is how long it has been since it switched focus from software products for telecom to a product-plus-services strategy for the same industry. Numbers also don't tell that Sasken's product business-long responsible for its slow growth-is at an inflexion point and could break even by next year. And that its services business, which accounts for 85 per cent of its revenues, is gathering momentum. "We are poised for a hockey stick kind of growth, since most of our products will start yielding steady royalty incomes even as we grow exponentially," says Sasken's Chairman and Managing Director, Rajiv Mody, who set up the company (in a garage) in 1989 in us.

A Hybrid Play

At present, a handful of large companies make up Sasken's customers in services. Those include network equipment vendors (think Nortel, Lucent, Motorola, Nokia, Ericsson), semiconductor companies (Texas Instruments, Intel), terminal equipment manufacturers (DBTel, BenQ, CMCs), and partnerships with operating system suppliers such as Symbian and Ericsson. Then, its products and services are targetted at device makers (Nokia, Motorola, Samsung, Sony, Panasonic, LG, and Kyocera), and service providers such as Orange T-Mobile and Vodafone. "There are just 40-odd players who constitute our entire customer universe," points out Prabhas Kumar, Sasken's coo.

Adding new customers will be important, but it is apparent that Sasken's growth will largely come from getting a bigger share of the spend by existing customers. How does the company plan to do that? By constantly increasing the portfolio of solutions and services, says Kumar. Currently, it does so by offering wireless software components, chip design and software services to semiconductor companies. It also provides testing and measurement companies software services. Apparently, the strategy going forward is to establish proximity centres across the globe to service customers more effectively. "We will have our centres up and running in Mexico and China by next quarter, and we intend to scale them up," reveals Kumar.

Telecom R&D services is another area where Sasken is working closely with customers such as Nortel and Texas Instruments. The former, in fact, is the single-largest customer, accounting for more than a quarter of Sasken's revenues. The profit margins of 37 per cent in the services business are very attractive and, not surprisingly, make it the most lucrative end of its hybrid play. However, there's competition to reckon with. For instance, Wipro has the biggest outsourced R&D business (among Indian it companies) as well as a telecom practice; hardware manufacturer Flextronics is also a competitor, thanks to its acquisition of Hughes Software Systems, which has a big telecom focus. A potential problem for Sasken is that while it has telecom expertise, it doesn't have the scale of its bigger competitors. "Increasingly in R&D, scale will become critical, since one needs to spread costs among as many customers as possible," says the head of telecom R&D practice in a rival firm.

Mody, however, is confident that his services business will continue to grow despite stiff competition. In October last year, Sasken acquired Blue Broadband Technologies (now called Sasken Networks Engineering, a subsidiary) to offer turnkey telecom solutions in the networking and engineering space. Also, to ensure that the big customers stay with it, Sasken has sold them shares in itself. Nortel owns 11.7 per cent, Nokia 2.2 per cent, and Intel 10.6 per cent. "This way, customers who outsource R&D to US won't have to worry about Sasken suddenly getting acquired by someone else," explains Mody.

G Venkatesh: Focus is on scaling up

Dalal Street analysts seem to believe that such strategies are working. Priya Rohira, an it analyst with Enam Securities, feels that Sasken's services deals-where average prices have gone up-will see considerable momentum. She points out that the company's services revenue in the second quarter grew 13.7 per cent over the previous sequential quarter in spite of lower employee utilisation due to fresh recruitment. "We also expect employee utilisation to go up to 75 per cent by next quarter," says Rohira.

The Product Promise

As mentioned earlier, what sets Sasken apart from other it services firms is its hybrid strategy of services-plus-products. Under an umbrella called Strawberra, Sasken offers multimedia applications and CODEC engines (software that compress and decompress data). That means it provides things like an integrated audio and video player, imaging application and video camcorder, semiconductor and handset vendors can simply buy these products off the shelf and shove them into their devices.

Already, Sasken's products are used in 31 phone models, which so far have sold more than 8 million units. Among the companies that have either licensed or paid royalty for use of Strawberra products are NEC, NTTDoCoMo, DBTel, Panasonic, and Telepaq. Says G. Venkatesh, Chief Strategy Officer and head of products division: "What we offer our customers are reduced time to market, commitment to invest and share risk, and support in integration, field trials and inter-operability tests."

Mody feels that as 3G phones become more popular, Sasken will gain more traction in selling its product applications and CODECs. Recently, the company moved away from a licensing to a royalty-based fee system to get a greater share of the explosive growth in telecom. "Sticking to a licensing model would have minimised our risks, but it would have minimised our pay-offs as well," explains Mody. What made Mody change tack was his experience with a Taiwanese player, MediaTek. Instead of striking a royalty-based deal (where the fee is on every unit shipped), Sasken went in for a one-time licensing fee. A bad move, considering that MediaTek went to sell 3 million phones that used on Sasken's technology.

Rohira of Enam says that of the eight new semiconductor platform deals, five are royalty-based and expects the product division to break even next year. "They have shown good performance in the products business with year-on-year growth of more than 150 per cent," she notes. Given its new emphasis on royalty, Sasken has decided to enhance its ip portfolio. It currently boasts of seven us patents, but another 20 are at different stages of review. Also, Sasken plans to enter the domestic broadband market with its retail product, a modem.

A Mumbai-based analyst with a top securities firm, however, thinks Sasken faces considerable challenges ahead. He points out that disproportionately high investments were made by telcos over the last two years to make up for their lack of investments since 2000, when the telecom market collapsed. And that money has benefited companies like Sasken. He fears the pace of investment may not be sustained, besides which the bigger Indian it companies are scaling up their telecom practice, which will make the going tough for Sasken. "No doubt Sasken is strongly positioned, but it will have to execute relentlessly if its hybrid model has to succeed," says the analyst.

Mody agrees that Sasken's challenge lies in scaling up and execution. But he says the worst is behind them. "We have survived the worst of times, and managed to attract and retain the right kind of talent, as evidenced by Business Today's own survey," says Mody, referring to the BT-Mercer study of the Best Companies to Work for in India (see issue dated November 20, 2005). He is right. Employees are solidly behind him as he strives to build a differentiated it company. But to keep their faith, and that of his investors, Mody will have to get his product strategy to start paying off in a big way-soon.