Sasken Communication Technologies Ltd

BSE: 532663 | NSE: SASKEN | ISIN: INE231F01020 
Market Cap: [Rs.Cr.] 682.04 | Face Value: [Rs.] 10
Industry: Computers - Software - Medium / Small

Management Discussions
Management Discussion and Analysis Report

IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS CERTAIN FORWARD -LOOKING STATEMENTS. THE FORWARD - LOOKING STATEMENTS CONTAINED HEREIN ARE SUBJECT TOCERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROMTHOSE REFLECTED IN THE FORWARD - LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH ADIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL PERFORMANCE AND ELSEWHERE IN THIS REPORT. READERS ARECAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD - LOOKING STATEMENTS, WHICH REFLECTMANAGEMENT’S ANALYSIS ONLY AS OF THE DATE HEREOF.

Management’s discussion and analysis of financial performance

The consolidated financial statements have been prepared in compliance with therequirements of the Companies Act, 1956, and Generally Accepted Accounting Principles(GAAP) in India. The management accepts responsibility for the integrity and objectivityof these consolidated financial statements, as well as for various estimates and judgmentsused in preparing the financial statements. The management’s discussion and analysisis based on the consolidated financial statements.

Company brief

Sasken is an embedded communications solutions company that helps businesses across thecommunications value chain accelerate product development life cycles. Sasken offers aunique combination of research and development consultancy, wireless software products andsoftware services, and works with Network OEMs, Semiconductor Vendors, Terminal DeviceOEMs, Operators, Auto, Consumer Electronics and retail enterprises across the world.Global Fortune 500 and Tier 1 companies in these segments are part of Sasken’scustomer profile. Established in 1989, Sasken employs 2,000+ people, operating from state- of - the - art research and development centers in Bangalore, Pune, Chennai andHyderabad in India, Kaustinen and Tampere in Finland. Sasken is also present in Beijing(China), Korea, Kanagawa (Japan), London (UK), Chicago, Dallas & Santa Clara (USA) andSeoul (South Korea).

Sasken has carved a unique position by a thorough understanding of all components ofthe communications eco - system. The value proposition that Sasken brings is its uniqueability to reduce time to market enabling OEMs to speed up their product launch. Inaddition, Sasken can help customers keep pace with constant changes due to evolution oftechnology and the resultant fragmentation, by helping customers deliver products that arecompatible and conform to current releases of both hardware and software.

In addition to being directly involved in the development of a variety of technologies,Sasken is a member of premier technology bodies and forums. Sasken quality managementsystems are certified by ISO 9001:2000, ISO 27001 and TL 9000 standard bodies.Sasken’s commitment to environment is highlighted by its ISO 14001 certification.

Outlook

The headwind due to a prolonged economic recession has impacted all sectors of theindustry and the technology sector is no exception. In addition, in the technologyindustry, there is a high degree of churn which continues to disrupt the ecosystem thatserves it. The positive upshot of all this however is, competitive pressures have resultedin a stronger emphasis on maximizing returns on global engineering R&D spends. NASSCOMestimates that there has been a cumulative annual growth rate of approximately 10% onengineering R&D spends.

Business environment

The explosive growth in the adoption of smartphones and tablets is making a significantimpact in the traditional world view of computing and communications. Together, thesedevices have had a deep influence on business as well as social communication. These newera devices are expected to dwarf personal computers and are eventually substitute them inmost contexts. The telecommunications vertical is responding to two years of muted growthby investing heavily in newer and efficient technologies like LTE and adopting innovativebusiness models to combat the loss in revenue. The increase in internet / data access viasmartphones and tablets are placing enormous pressures on networks which struggle to copewith the surge in traffic. Service providers are turning to enhancing network performanceto remain competitive. These trends will make companies stretch their returns from theirR&D investments and drive them to explore partnership models.

The uptake in engineering R&D spends is predominantly from verticals likeautomotive, consumer electronics and telecommunications. In addition, a significantportion of this engineering R&D spend is expected to be outsourced to Asian economies,notably India and China. Companies are now extending their focus beyond efficiency toaddress issues such as localizing product development for emerging markets and addressingthe need to incorporate mobility and connectivity as an integral part of their productportfolios.

As the smartphone and tablet players extend their focus to serving needs of mass marketusers, a clear stratification of OEMs will result. The three - cornered race for mobileoperating systems is getting hotter with new entrants like Tizen and Firefox, who arealready seeing market traction. The domination by vertically integrated players like Appleis making those who are relying on open source systems to rethink their strategies andshift their focus toward software, which will soon be a key differentiator. Automanufacturers are today viewing the car as ‘connected’ and increasingly seekingsolutions that can enhance driver assistance, safety and passenger entertainment. Consumerelectronic device manufacturers are buoyed by the emergence of the ultra high definitionTV and the increasing appetite for seamless connectivity between all domestic appliancesand the smart phone. The nexus of forces between social, mobile, location, cloud arecontextually enriching the way we communicate. These forces are enabling players indiverse areas such as retail, healthcare and public safety, on one hand to better servicetheir customers and on the other hand to enhance their internal efficiency.

These trends largely auger well for a robust demand for engineering R&D serviceproviders, an area in which we have been specializing for over two decades now.

Growth opportunities for Sasken

The tectonic shifts in the technology sectors have resulted in companies seeking newermodels for collaborative product development. Propelled by this vortex of pressure,companies are engaging with service providers who can offer more than skill basedaugmentation to meet volume requirements. Most manufacturers have globally distributedinnovation centres which are also coming under pressure to move up on the value they bringto their head quarters. These shifts are being labeled by some industry analysts as theemergence of a demand for providers of global product development services.

We have been one of the forerunners in providing product development services due tothe robust nature of our offerings portfolio. We have a strong competency base in areasincluding Modem & Connectivity, Smart Devices & System Software, IC Design,Networks, Multimedia and Semiconductor solutions. In addition, we have made investments inbuilding capabilities to address the needs of enterprise mobility and healthcare. Theinvestments that we have made in our training engine and internal competency managementsystem ensure that we have the requisite breadth and depth of knowledge to continually addvalue to our customers.

In our endeavour to strengthen existing offerings and create newer ones, we have manyongoing asset creation programs. These efforts are further bolstered by several boot campswe run internally to foster an environment that encourages innovation. We take stock ofthese offerings and solutions by inviting both existing and prospective customers to ourbi - annual event called KenTechFest.

We have also begun the process of expanding our portfolio of offerings to address newareas like:

• Machine - to - Machine (M2M) communication

Our joint venture with IDG, ConnectM has built a scalable M2M platform which has beentested in the Indian market. This platform services the needs of telecom service providersto monitor their tower based infrastructure. Additionally, this platform has been deployedto monitor and manage the energy consumption of large enterprises. We have signed up apartnership program with Verizon nPhase and are exploring opportunities to leverage thisin the international markets.

• mHealth

We are expanding our horizons in the mHealth arena beyond remote patient monitoring. Wehave built a tablet based solution for allowing patients to effectively learn and managethe progress of their treatment. This is enabled by capturing in real - time, variousparameters that allow the care giver greater insight into managing the patient’s wellbeing. With these initiatives, we are strengthening our ability to be a valuable partnerto healthcare service providers.

These areas provide us ample scope to broad - base our offerings, improve marketcoverage by enabling us to serve new and fast growing segments.

We believe that we are well placed to address the needs of being a partner who iscapable of providing global product development support to our customers. This confidencestems from our relentless focus in building competencies that straddle the entire productdevelopment cycle and spans the entire canvas, from silicon to solutions. Our 2,000+strong organization, marquee customers and deep rooted competencies differentiate us fromcompetition, enabling us to be a partner of choice when it comes to providing engineeringR&D services.

Delays and restrictions in awarding experimental license on the use of RF equipment forproduct testing continue to put pressures on the industry. Sasken actively collaborateswith other firms in the sector and work closely with industry bodies such as NASSCOM toaddress this issue for better stability of R&D outsourcing services.

We now provide a brief outlook in the different market segments that we operate in.

Mobility, Automotive and Consumer Electronics

The automotive industry continues to drive towards positioning the car as an integralpart of the mobile application platform. The motivation for this are many fold and includenavigation and driver assistance, emergency response and support, enhanced remotediagnostics, vehicle tracking and recovery and in - vehicle infotainment. We continue toconsolidate the early in - roads we have made by enriching the services that can bedelivered out of a vehicle’s infotainment system. We are building capabilities thatcan leverage the presence of a Wi - Fi supported device in the car and turn the same intoa wireless hub for seamless sharing of content and media by the passengers in the car. Wecontinue to see an uptake in the adoption of our in - vehicle infotainment systems as ourcustomer continues to service more global automotive brands.

We continue to focus our efforts in the Consumer Electronics (CE) space by targetingmanufacturers of Set Top Boxes (STBs), Digital TV solutions, Multimedia, Digital LivingNetwork Alliance (DLNA), Home entertainment and Android based solutions. We are workingwith a semiconductor vendor to support the development of STBs based on open platformssuch as Linux and Android.

The growing market for STBs in developing countries which are aggressively moving awayfrom analog cable based delivery systems to conditional access based digital systems,augers well for our CE practice. Building on our success in delivering wireless streamingcapability for premium speakers that are compatible with Apple’s Airplay, we havemade inroads to work with high - end headsets targeted toward professionals and audioenthusiasts. Our solution will allow streaming of high quality audio from the internet orsmartphones directly onto the headset.

Personal & Smart Devices

We have been seeing the bottoming out of the ramp downs from one of our largestcustomers, whose change in software strategy adversely impacted our business. The pace ofevolution of the Android platform provided us opportunities to offer services tosemiconductor vendors and smartphone OEMs and ensure that their products supported themost current version of the Android OS.

The proliferation of Android as a preferred operating system across a plethora ofdevices including phones, tablets, STBs and ruggedized terminals provided us opportunityto build and consolidate our leadership position in the Android ecosystem. Our portfolioof offerings in the Android space includes complete device productization, OS upgrades,connectivity and integration of third party components. Our hardware capabilities continueto be one of our differentiators, particularly our expertise in RF design and testing. Wehave been working with developers of RF reference designs for the LTE platform to supportproduct testing and RF tuning prior to manufacture.

Capitalizing on our investments in building competencies around the Windows 8 OS, wetake pride in supporting one of the world’s largest semiconductor manufacturers inachieving Windows 8 based hardware certification from Microsoft and thereby helping themmake an entry into the fast growing market for tablets based on the Windows 8 OS.Currently our engagements in the Windows 8 arena are with semiconductors and this upstreampartnership will help us address the needs of Windows 8 based smartphone and tablet OEMs.

In the area of ruggedized devices that address specific verticals such as civildefense, logistics and retail, we are providing services to help manufacturers migrate toopen platforms like Android. In the smartphone space, our expertise in power managementand memory optimization has helped OEMs deliver the promise of n+1 software upgrades onexisting hardware platforms resulting in better battery life, without compromise onfunctionality.

Networks, Satellite and Government

We have a deep understanding of radio access networks from GSM and its evolutionincluding GPRS and EDGE, 3G and LTE. We are engaged in providing services to a vendor ofLTE based pico base stations. Our customer’s market traction in Korea which is one ofthe leading adopters of these technologies augers well for us as many market analystsforecast greater global deployment of these pico base stations. The width of our knowledgeon access technologies has given us an opportunity to examine tail markets for 2G and 2.5Gbased networks with manufacturers focused on 4G who need to achieve backwardcompatibility.

We are engaged with a Japanese smart device OEM in providing services to enable RichCommunication Suite - enhanced (RCS - e). RCS - e addresses the operator’s need tofight revenue loss resulting from Over the Top (OTT) services by helping themdifferentiate their service offerings. The exciting features that RCS - e enables includeinstant messaging, chat, file / video sharing and transfer, across any device or network,with anyone.

We continue to build on the services we provide to manufacturers of Terrestrial TrunkedRadio (TETRA) standard based terminals used in the civil defense market and continue toexplore opportunities to services other elements of the TETRA service delivery ecosystem.

We have successfully bagged a large follow - on contract from Inmarsat to furtherenhance the ISatPhonepro that we built. We are now entrusted with providingboth hardware and software enhancements. These efforts will result in the introduction ofnew features such as integration of GPS, enhanced user interface and a complete makeoverof the RF performance of the phone. This follow - on project is testimony to the uniqueabilities that Sasken offers to its customers in the area of full product realization.

Semiconductor and Silicon Platforms

Traditionally, we have strongly focused on semiconductor and silicon platforms arena.This has enabled us to engage very early in the product development lifecycle assemiconductor manufacturers lead efforts to bring products to market. Our strengthsinclude the ability to offer full chip design services including RTL enhancements, digitalimplementation, verification, analog design, layout and physical design.

The breadth of our service offering includes the support we provide for semiconductorvendors to be able to support the latest version of Android to enable them to gain bettertraction with their customers, providing analog design services in the area ofverification and layout, enhancing security features on technologies like near fieldcommunications (NFC) fast becoming the standard for high volume, low value transactions.Additionally, we provide mission critical field testing services that pose both logisticsand technical challenges as the scope of these projects typically span 30 countries overmultiple geographies.

Opportunities are forthcoming in this segment due to the insatiable appetite formobility, better social network experience and improved quality of experience whileconsuming multimedia content. These drivers have pushed the demands on chipset vendors tooffer energy and cost efficient solutions by splitting competition tasks in a manner thatensures optimal utilization of the underlying hardware. We have been able to work with theconstraints of limited battery capacity that devices such as smartphones and tablets haveby optimizing the design of the software we deliver.

Mirroring the observations of industry analysts, we see much of the work in thesemiconductor and silicon platform area coming from segments such as automotive, consumerelectronics and wireless devices such as smartphones and tablets. As the products launchedby firms in the above mentioned sectors get past the early adopters and start addressingmass market requirements, we see opportunities emerging from challengers who positionthemselves to service such market opportunities. Further, new entrants in the mobile OSssuch as Tizen and Firefox will provide new opportunities for us as a number of device OEMshave committed to launching products based on these newer OSs.

Service Providers and Independent Software Vendors

We continue to explore ways in which we can leverage competencies we have in workingwith semiconductor vendors, OEMs producing smart devices and manufacturers of network gearto serve telecommunication service providers. Our efforts in serving telecommunicationservice providers so far have been in the area of network engineering support which weprovide through our subsidiary Sasken Network Engineering Ltd.

We recently commenced an engagement to provide audio solutions to offer superior voicecommunications in demanding environments such as trading stations for one of UK’slargest telecommunication service provider. We have worked with a leading Android basedhandset OEM to offer RCS - e services to meet the requirements of a large Europeanwireless service provider. Additionally, our field testing and country adaptation serviceshave allowed semiconductor OEMs and their partner OEMs to better address and servicecarrier specific requirements.

We have made a small but significant entry in addressing the needs of independentsoftware vendors who are emerging as pivotal constituents of the communications ecosystem.We are providing services to the global leader in building financial solutions bysupporting them in the development and testing of financial service solutions. This willenable their end users to experience seamless access to online banking solutions on theirsmart devices.

Sasken has over the last 25 years garnered an enviable set of marquee customers to whomit provides world class, cutting - edge solutions across the product developmentlifecycle, making us a leader in the mobile technology space. We continue to makeappropriate investments in further enhancing our technology capability and the skill andexpertise of our talent pool.

Financial results for the Year Ended March 31, 2013

• Consolidated revenues for FY 2013 were 347,483.08 lakhs, a decrease of 8.7%,from 351,995.83 lakhs in FY 2012.

• Software Services revenues, Network Engineering Services revenues, SoftwareProduct revenues and Automotive, Utilities and Industrial revenues net off inter segmentalrevenues were 341,344.79 lakhs, 33,177.15 lakhs, 32,744.37 lakhs and 3226.77 lakhsrespectively, for FY 2013.

• The revenue mix amongst Software Services, Network Engineering Services,Software Products and Automotive, Utilities and Industrial revenues changed to 87:7:6:0 inFY 2013 from 84:7:8:1 in FY 2012.

• Cost of Revenues decreased to 335,631.96 lakhs which was 75.0% of revenues in FY2013 as against 336,523.29 lakhs which was 70.2% of revenues in FY 2012.

• Gross profit margin, for FY 2013 was 25.0% as against 29.8% in FY 2012. Inabsolute terms, gross profit after research and development expenses were 311,851.10 lakhsin FY 2013 as against 315,472.54 lakhs in FY 2012.

• Selling, General and administration costs have decreased to 37,659.84 lakhs -16.1% of revenues in FY 2013 from 37,822.95 lakhs - 15.0% of revenue in FY 2012.

• Consolidated EBITDA was 34,191.33 lakhs in FY 2013, a reduction of 33,458.25lakhs from 37,649.59 lakhs in FY 2012. EBITDA margins were at 8.8% for FY 2013 as against14.7% for FY 2012.

• Other Income for FY 2013 was 31,764.33 lakhs (including exchange gains of3469.73 lakhs) - 3.7% of revenues, as compared to 32,640.99 lakhs (including exchangegains of 3949.17 lakhs) - 5.1% of revenues for FY 2012.

• Consolidated Profit Before Tax (PBT) saw a drop of 50.3%, to 33,972.87 lakhs inFY 2013 from 37,994.79 lakhs in FY 2012. In absolute terms, the PBT decreased by 34,021.92lakhs in FY 2013.

• Consolidated Profit After Tax (PAT) has decreased by 50.1%, to 33,195.93 lakhsin FY 2013 from 36,400.80 lakhs in FY 2012. In absolute terms, the PAT decreased by33,204.87 lakhs in FY 2013. The PAT margins for FY 2013 were 6.7% as against 12.3% in FY2012.

• Consolidated basic Earnings per Share (EPS) for FY 2013 was 313.26 (324.82 in FY2012) and diluted EPS for FY 2013 was 313.11 (324.44 in FY 2012).

• Cash and cash equivalents (including investments in mutual funds and termdeposits with banks) stood at 314,898.23 lakhs as at March 31, 2013 as compared to318,448.26 lakhs as at March 31, 2012.

• DSO days (excluding unbilled revenues) is 73 days as at March 31, 2013 (73 daysas at March 31, 2012).

• The Board of Directors has recommended a final dividend of 45%. An interimdividend of 25% was paid during the year taking the overall dividend for the year to 70%,same as that declared in FY 2012.

Results of Operations

Particulars Year Ended March 31, 2013 Year Ended March 31, 2012 Increase / Decrease
(In 3 lakhs)

(%)

(In 3 lakhs)

(%)

(%)
Revenue from Operations 47,483.08

100.0

51,995.83

100.0

-8.7
Employee Benefits Expense 32,431.63

68.3

33,281.38

64.0

-2.6
Inventory Related Expenses (9.00)

0.0

474.61

0.9

-101.9
Other Expenses 10,869.12

22.9

10,590.25

20.4

2.6
Total Expenditure 43,291.75

91.2

44,346.24

85.3

-2.4
Profit before Interest, Taxes, Depreciation and Amortization 4,191.33

8.8

7,649.59

14.7

-45.2
Interest & Borrowing Expenses 41.34

0.1

60.36

0.1

-31.5
Depreciation and Amortization Expense 1,941.45

4.1

2,235.43

4.3

-13.2
Other Income 1,764.33

3.7

2,640.99

5.1

-33.2
Profit before Taxes 3,972.87

8.3

7,994.79

15.4

-50.3
Income Tax Expense 776.94

1.6

1,593.99

3.1

-51.3
(Including deferred tax benefit and MAT credit entitlement)
Net profit for the year 3,195.93

6.7

6,400.80

12.3

-50.1

Revenue from Operations

We derive revenues from software services, product and technology licensing, andinstallation and commissioning services. Revenue from time and material service contractsis recognized as the services are provided. Revenue from fixed price service contracts andcustomized products or technology developments is recognized based on the proportionatecompletion method, determined based on the achievement and acceptance of the milestone,provided collection is probable. Revenue from maintenance contracts is recognized ratablyover the term of the maintenance arrangement. Licensing revenue is recognized when theproduct or technology is delivered and accepted. Revenue from royalty is recognized on anaccrual basis based on customer confirmation of shipment volumes, provided collection isprobable.

In all cases, revenue is recognized only when no further vendor obligations remain, upto the stage of revenue recognized and collection is probable. Revenue related to postcontract customer support is recognized ratably over the support period.

In FY 2013, we witnessed a phenomenal amount of churn on account of the rapid changesin technology and the strategic changes made by two of our large customers. While onecustomer completely re - vectored its software strategy, another exited the wirelessspace. We were able to mitigate the impact of decline in revenues from both thesecustomers and the significant project ramp downs that ensued. We have managed to minimizethe impact of the revenue decline by adding new customers, focusing and creating newofferings. We have put forth our best efforts to ensure that our margins do not contractand have taken all measures within our control to return to growth in the coming fiscal.

In FY 2013, in INR terms, services revenue contributed 93.7% of the overall revenues.For FY 2013, services revenue was at 344,511.94 lakhs as against 347,495.99 lakhs in FY2012, lower by 6.3%.

The services revenue by project type is as follows:

In %
Particulars FY 2013 FY 2012
Time and Material 77.5 76.6
Fixed Price 22.5 23.4
Total 100.0 100.0

We continue to focus on increasing share of ownership projects to meet customerexpectations and to protect margins.

Services revenue (including Network Engineering segment) derived from servicesperformed in development centers in India are categorized as offshore revenues andrevenues from other locations are categorized as onsite revenues. The offshore onsite mixof revenues was as follows:

In %
Particulars FY 2013 FY 2012
Onsite 31.8 28.5
Offshore 68.2 71.5
Total 100.0 100.0

In FY 2013, in INR terms, software product revenue contributed 5.8% of the overallrevenues. For FY 2013, software product revenue was at Rs 2,744.37 lakhs as against33,948.95 lakhs in FY 2012, lower by 30.5%.

Details of software product revenue were as follows:

In %
Particulars FY 2013 FY 2012
License fees 32.3 20.2
Royalties 63.1 75.8
Customization 4.6 4.0
Total 100.0 100.0

Backed by credible evidence, we believe that one of our non-Indian licensees hasbreached its obligations, inter alia, to report shipment and royalty numbers and to payfor the same. The said licensee has claimed non-usage of licensed IPR, while it continuesto use the same. As the said licensee has not reported shipment numbers to us, we have notrecognized any revenue stream from royalties due from the licensee, in our financialstatements, from July 2012. We have initiated arbitration proceedings against the saidlicensee, for non-payment of royalties owed to us under an agreement, and other breaches.

The licensee, which is a US-listed company, is reported to have more than 50% marketshare in the TD-SCDMA Baseband chip market in China; and is reported to have sold over 40million units in 2012. Based on leading market analysts’ reports, the overall marketis expected to grow to around 160 million un

Futures & Options Quote
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Key Information

Key Executives:

Rajiv C Mody , Chairman and MD & CEO

G Venkatesh , Whole-time Director

Krishna J Jhaveri , Whole-time Director

Ashok Jhunjhunwala , Director


Company Head Office / Quarters:

No 139/25 Domlur Layout,
Ring Road Domlur Post,
Bangalore,
Karnataka-560071
Phone : Karnataka-91-80-39891122 / Karnataka-
Fax : Karnataka-91-80-39813329/25351309 / Karnataka-
E-mail : investor@sasken.com
Web : http://www.sasken.com

Registrars:

Karvy Computershare Pvt Ltd
Plot No 17-24 ,Vittal Rao Nagar ,Madhapur ,Hyderabad-500081

 
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