"DESPITE A CHALLENGING YEAR, WE REMAINED CASH POSITIVE AND CONTINUED TO INVEST INBUSINESS GROWTH"
Mr GV Kumar, CEO, reviews the Company's performance
Q: Were you pleased with the Company's performance during the year under review?
A: The Company's performance was not what we had budgeted at the start of 2011. Theunder performance was on account of the following reasons: - We lost a major clientduring the year under review. The full impact of this attrition will be felt visibly onlyduring the first six months of 2012.
- There was a delay in launching the poster product by six months from the secondhalf of 2011, translating into a notional revenue loss of around Rs 150 million in 2011.The launch will happen in the first half of 2012.
- The currency volatility made it difficult to plan.
However, we must assure our shareholders that we embarked on a number of initiatives tomitigate the impact of client attrition and currency volatility, while making up for losttime through the profitable launch of our poster product and other new business lines.
Q: What were some of the high points of the Company's working in 2011?
A: The biggest point that I must make is that despite facing a decline in revenues, theCompany continued to deliver on its core philosophy - continued to innovate, achieved 100percent SLAs with all clients (execution excellence) and remained cash positive (financialdiscipline).
Besides, what was assuring is that the core competence that we built over the years inour specialised line of business continued to remain protected in 2011 despite externalupheavals. The result was that a number of our old clients continued to work with us; 85percent of our revenues were derived from long-standing customers during the year underreview without any penalties for under-delivery. This is easily our single most assuringfactor in 2011.
We didn't just work with long-standing customers; we conducted a customer satisfactionsurvey that made it possible to rate our performance in an unambiguously numerical way.The result was that our rating increased from 6 to 8, which will translate into higherbookings from each customer and a wider spread of customers.
We extended our positive working experience with LatAm telco from two properties toseven, which is an index of the customer's confidence in our capability.
Even as the external environment continued to remain challenging, we continued tolaunch new products: a full 10-inch Android-based system in our poster product segment andscalability-cum-3G and 4G compatibility of our Mobile Services Platform.
We entered the 4G segment when 3G investments are yet to complete their pay back.Mobile operators, especially regional and smaller operators, face a number of competitiveissues: launching next-generation services like mobile broadband comprising the followingissues:
- Supporting and maintaining existing 2G/3G subscribers while embarking on building a4G network
- Mobilising significant investments for a broadband network overlay - Marketinginnovative solutions to attract subscribers
XIUS leverages years of mobile network and infrastructure design, development andoperational experience to deliver the following solutions:
- Work closely with clients to assess and build a map for their network evolutiongoals
- Provide best-in-class solutions and components to enable clients to deliver qualitycost-effective services
- Provide appropriate shared managed services infrastructure and solutions, resultingin a combination of prudent capex and opex models
Q: What initiatives did the Company take to protect it from operational volatility in atechnology-led business?
A: Over the years, we took a conscious decision. We would create a hybridised businessmodel comprising one-off income from technology intensive product sales on the one handand recurring income from multi-year managed services on the other. While one part of thebusiness would bring chunky revenues, the other part would generate predictable andsustainable revenue flows. The result was evident in 2011: we generated around 80 percentof our business from recurring multi-year managed services, helping us remain cashpositive and report a reasonable surplus in 2011.
The Company strengthened other de-risking initiatives as well: its cash and cautionapproach resulted in debt draw down of over Rs 109 million during the year. This in turnreduced the Company's
interest outflow from Rs 151 million in 2010 to Rs 98 million in 2011, strengtheninginterest cover even as we faced a temporary decline in our bottomline from Rs 217 millionto Rs 175 million - a rare phenomenon. This only indicates that while there was a declinein the quantum of our earnings, there was an increase in the quality.
As a responsible Company, we continued to clean up our balance sheet: we wrote off(including provisions) Rs 69 million of bad debts that were derived from oldinfrastructure clients, where the revenues were distributed across about four years. Weexpect to write off old outstanding debts, if any, completely by 2014.
Q: What is the optimism that you would like to leave with shareholders?
A: The optimism that we would like to leave with our shareholders is the depth of ourrobust business model: our existing managed services order book possesses long-termcontract tenures. Additionally, we possess a good order book position and also expect tostart earning attractive revenues from the launch of our poster product. The combinationof these three revenue streams at slightly higher margins is likely to more than cover ourprojected cumulative annual expense for 2012.
Q: You indicated the launch of a poster product. Can you explain its significance?
A: At Megasoft, we have always prided on the launch of products positioned at thecutting-edge of technology that take the consumer experience ahead. Our poster product isprecisely this kind of product: it provides a virtual store front (interactive kiosk wherepersons can use their mobile - not credit card - to download pictures, songs, transfercash, among others). As in all successful product companies where the product is developedslightly ahead of the market requirement, we feel that this product is future-ready. Moreand more people will carry less and less cash; more and more people will want to use theirmobile
instruments to do everything - talk, text and transact. Megasoft is positionedattractively to capitalise on the third leg: just when the uptick starts - which we expectanytime soon - Megasoft will be positioned to translate the value of its technologyintensive product into revenues and profits.
Q: Shareholders find it unusual for an IT company to have debt on its books.
A: We share the sentiment. This is a legacy of the Company's acquisition financeactivities a few years back. The Company is committed to an asset-light approach and, inline with this, liquidated its Hyderabad property in 2010 to pay off some of its debt,while we will pay the rest through accruals and emerge as a debt-free company by 2014.This reduction in indebtedness will not only reduce the annual interest outflow but willright size the Company's overall financial structure in relation to its revenue earningcapability, resulting in renewed investor interest.
Q: Shareholders are concerned about the low market capitalisation of around Rs 500million.
A: At Megasoft, we recognise that we are in business to enhance shareholder value. Weare convinced that the Company is waiting for the right triggers - a good large account,successful closure of all pipeline deals and launch of the poster product. We areconvinced that as soon as these realities transpire, there will be a renewed investorinterest in the Company followed by a re-rating that strengthens our marketcapitalisation.
Q: How is the Company placed within the global landscape of technology-intensive mobiletelephony application and services companies?
A: Megasoft enjoys a unique position for some good reasons: our technology competenceis among the best in the mobile telephony industry - Near field communication, mobilecommerce transaction (mobile advertising platform) and mobile retail services (enterprisemobility and mobile enablement) and wholesale MVNO services. These represent the next bigwaves in the global telecommunication sector and even if one of them takes off, we will beamong the first companies to capitalise on the transition.
Besides, Megasoft represents a prudent and profitable combination of the east and westwhere our products are developed at a fraction of the cost incurred in the developedmarkets (the investment in these business segments was funded through accruals); we marketour products in the largest market in the world (US); we operate on a global scale andmore than 80 percent of our revenues are derived from mature global markets with customersdrawn from credible and reputed Tier 1 backgrounds; we are a research-driven technologycompany having filed around 120 mobile telephony patents (30 granted).
The next obvious question that shareholders will have is how we expect to monetise thisintrinsic value. What we need to educate our investors is that the success of aproduct-driven mobile technology company will always be influenced by spikes in revenues.As a result, investors will need to back capability as distinct from performance. In ourcase, we recognise that we need to demonstrate some big wins for the markets to startbelieving in the credibility of our business model, which I am sure, will happen soonenough.
Q: What is the message that you would like to leave with your shareholders?
A: We possess the fundamentals to succeed: presence at the cutting-edge of our businessspace which will make us relevant for the next number of years, R&D innovationcapability that will make it possible for us to launch relevant products to take theconsumer experience ahead and an operating structure that makes it possible for us to stayprofitable and liquid even in the most challenging market environments.
G P Srinath
Your directors are pleased to present their report on the business and operations ofyour company for the financial year ended 31 December 2011.
| || || || ||(Rs. million) |
| || |
|for the year ended 31 December ||2011 ||2010 ||2011 ||2010 |
|Revenues ||501 ||624 ||1,504 ||1,679 |
|Total Expenditure ||394 ||383 ||1,098 ||1,145 |
|Finance Cost ||28 ||70 ||98 ||151 |
|Depreciation ||41 ||57 ||129 ||143 |
|Operating Profit / (Loss) ||38 ||114 ||179 ||240 |
|Profit / (Loss) before tax ||61 ||50 ||181 ||214 |
|Less: Taxes ||6 ||(3) ||6 ||(3) |
|Profit / (Loss) after tax ||55 ||53 ||175 ||217 |
|Earnings per share (equity shares, par value Rs. 10 each) || || || || |
|Basic (Rs.) ||1.25 ||1.20 ||3.95 ||4.90 |
|Diluted (Rs.) ||1.22 ||1.20 ||3.87 ||4.90 |
During the financial year ended 31 December 2011, even as your company recordedconsolidated revenues of Rs. 1,504 million compared to Rs. 1,679 million in the previousfinancial year, net profit was Rs. 175 million compared to a net loss of Rs. 217 millionin 2010.
Your Directors do not consider it prudent to recommend any dividend on equity sharesfor the year under review.
A detailed discussion on the performance of the Company, industry structure, threats,opportunities, risks, future outlook and strategy is given separately in the ManagementDiscussion and Analysis (MDA) section, which forms a part of this annual report.
Pursuant to the provisions of Section 212(8) of the Companies Act, 1956, the Ministryof Corporate Affairs vide its circular dated 8 February 2011 has granted general exemptionfrom attaching the Balance Sheet, Profit and Loss Account and other documents of thesubsidiary companies with the Balance Sheet of the Company, provided such companiespublish the audited consolidated financial statements in the annual report. Accordingly, astatement containing brief financial details of the Company's subsidiaries for thefinancial year ended 31 December 2011 is included in the annual report. The annualaccounts of these subsidiaries and the related detailed information will be made availableto any member of the Company/its subsidiaries seeking such information at any point oftime and are also available for inspection by any member of the Company/its subsidiariesat the registered office of the Company. The annual
accounts of the said subsidiaries will also be available for inspection, as above, atthe head offices/registered offices of the respective subsidiary companies. The Companyshall furnish a copy of the details of the annual accounts of subsidiaries to any memberon demand.
In accordance with Clause 49 of the Listing Agreement with the stock exchanges, aseparate report on Corporate Governance and Management Discussion & Analysis togetherwith a certificate from the Company's auditors are provided as part of this annual report.
Disclosure as per the companies (Disclosure of particulars in the report of board ofdirectors) Rules, 1988
In terms of Section 217(1)(e) of the Companies Act, 1956, read with the Companies(Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, yourDirectors furnish the required details below:
(a) Conservation of Energy
The nature of your Company's operations is not energy intensive. Your Company believesthat it forms part of the duty to save energy and also install necessary apparatus whichwill help conserve energy. Your Company's computer terminals, air conditioning systems,lighting and utilities are modern technology-enabled to facilitate the optimal use ofenergy and power.
(b) Research and Development (R&D)
Your Company is actively engaged in the research and development of software. TheCompany's management team performs an end-to-end function by acting as the sounding boardand mentors for the R&D team to develop their ideas to facilitate market launch. Theteams will develop a unique approach and strengthen our positioning through tools,frameworks and methodologies to provide value-added services to clients.
(c) Technology absorption
Your Company believes that in addition to progressive thought, it is imperative toinvest in research and development to ascertain future exposure and prepare forchallenges. In its endeavour to obtain and deliver the best, your Company entered intoalliances with major global players in the industry to harness and tap the latest and thebest of technology in its field, upgrade itself in line with latest technology globallyand deploy/absorb technology wherever feasible, relevant and appropriate. Also, yourCompany also attached tremendous importance to indigenous development and technologyupgradation through its extensive Research and Development operations. The benefitsderived from these processes are phenomenal and improved the quality of your Company'sworld-class services.
(d) Foreign Exchange Earnings and Outgo
Foreign Exchange Earnings and Outgo: The details of foreign exchange earnings and outgoare given in note no. 10 & 9 of Schedule 17 -Notes to Accounts, forming part of theBalance Sheet and Profit & Loss Account of your Company.
Particulars of Employees
There are no employees falling within the provisions of Section 217(2A) of theCompanies Act, 1956 read with the Companies (Particulars of Employees) Rules, 1975, asamended.
Your Company has not accepted any fixed deposits and as such no amount of principal orinterest was outstanding as on the date of the Balance Sheet.
Mr R Janardhana and Mr Anish Mathew, directors of the Company, retire by rotation atthe ensuing Annual General Meeting and being eligible, offer themselves for reappointment.
Mr SV Ramkumar was co-opted as an additional director at the meeting of the board ofdirectors held on 28 February 2012. His appointment requires the approval of the membersat the ensuing Annual General Meeting. Notices have been received from members pursuant toSection 257 of the Companies Act, 1956 along with the prescribed fees. Mr SV Ramkumar,Chartered Accountant, with over 17 years of experience in consulting and industry, startedhis career in audit and consulting and has experience in agri commodities and softwareindustries. In the recent past, he was responsible for M&A and capital raisingincluding infra, construction, engineering and real estate. Currently, he is associatedwith Peepul Capital Advisors.
Human Resources Development
Your Company recognises the importance of human resources as it represents the backboneof corporate success. Your Company believes in nurturing human resources. Its focus is toenhance employee professional value and create a win-win for both. Your Company reinforcedthe best HR practices to recruit and retain talented employees. Your Company is confidentof reaping the best from its talent pool and sharing benefits with employees on anequitable basis.
The joint statutory auditors, M/s Srikanth & Shanthi Associates and M/s TNRajendran & Co., Chartered Accountants, retire at the ensuing Annual General Meetingand have confirmed their eligibility and willingness to accept office, if re-appointed.
Directors' responsibility statement
As required under Section 217(2AA) of the Companies Act, 1956, it is hereby statedthat:
(i) in the preparation of the annual accounts, the applicable accounting standards hadbeen followed along with proper explanations relating to material departures;
(ii) the directors had selected such accounting policies and applied them consistentlyand made judgments and estimates that are reasonable and prudent so as to give a true andfair view of the state of affairs of the company as at the end of the financial year andof the profit of the company for the year;
(iii) the directors had taken proper and sufficient care for the maintenance ofadequate accounting records in accordance with the provisions of this Act for safeguardingthe assets of the company and for preventing and detecting fraud and other irregularities;and
(iv) the Directors had prepared the annual accounts on a "going concernbasis".
Employee Stock Option Schemes
As required by Clause 12 of the SEBI (Employee Stock Option Scheme and Employee StockPurchase Scheme) Guidelines, 1999, the particulars of the stock option schemes arefurnished as annexure to this report.
Your Directors place on record their appreciation of the customers, bankers, Governmentof India and of other countries, Registrar and Share Transfer Agent, vendors andtechnology partners for the support extended. Your Directors also wish to place on recordtheir appreciation of the contribution made by employees at all levels without whom thegrowth of the Company is unattainable. Your Directors seek and look forward to the samesupport during future years of growth.
| ||For and on behalf of the Board of Directors |
|Chennai ||GV Kumar ||S Ravindra Babu |
|28 February 2012 ||Managing Director ||Chairman |
Annexure to the directors' report
Employees Stock Option Plans
|1 Particulars ||ESOS 2007 |
|Options outstanding as at the beginning of the year ||2,645,000 |
|(a) Options granted during the year ||- |
|(b) Pricing Formula ||Options have been granted at a discount to the latest available market price as on the date of grant. |
|(c) Options Vested** ||898,000 |
|(d) Options Exercised** ||- |
|(e) Total no. of shares arising as result of exercise of Options ||- |
|(f) Options lapsed * ||135,000 |
|(g) Variation in terms of Options ||None |
|(h) Money realised by exercise of Options (in Millions) ||- |
|(i) Total number of options in force** ||2,510,000 |
|** The number of options have been reported as on 31 December 2011 || |
|*Lapsed Options includes options cancelled/lapsed || |
|(k) Diluted earnings per share pursuant to issue of shares on exercise of option calculated in accordance with AS 20 'Earnings per Share' (Rs.) ||1.20 |
|(l) Pro Forma Adjusted Net Income and Earning Per Share || |
|Particulars ||( Rs. in Millions) 1 |
|Net Income || |
|As Reported ||55.25 |
|Add: Intrinsic Value Compensation Cost ||0.00 |
|Less: Fair Value Compensation Cost ||14.48 |
|Adjusted Proforma Net Income ||40.77 |
|Earning Per Share: Basic || |
|As Reported (Rs.) ||1.25 |
|Adjusted Pro Forma (Rs.) ||0.92 |
|Earning Per Share: Diluted || |
|As Reported (Rs.) ||1.22 |
|Adjusted Pro Forma (Rs.) ||0.90 |
Note: Disclosures under clause (j), (m) and (n) are not applicable as the company hasnot granted any options during the year.