Financial Analysis of Software Company

Table of Content

Company Overview

Aztec software, set up in 1995 in Bangalore, promoted by Mr. S Parthasarathy, work with software product development companies (Independent Software Vendors- ISVs). The company originally incorporated as a Private Limited Company was converted to a Public Limited Company with effect from June 12, 2000.

Five key technology focus in Aztec are in Data Management/ Business intelligence, Integration Engineering, Mobile Applications, Secure Identity Management and Web Services. The Group’s principal activities are to provide comprehensive software product engineering and quality engineering services that accelerate development of software products and reduce time to market. It has built, tested, and released over 1500 products in the 10 years of its existence. Aztec’s clients list includes Microsoft, AOL, Honeywell, Hyperion, Embarcadero, STEEL 24-7, and Cadence.

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In the year 2004 Aztec acquired Disha, India’s largest independent software testing solutions provider. The integration of Disha with Aztec is complete. The Group’s (Aztec and its subsidiaries) operations predominantly relate to providing software development services (Aztec) and independent software testing services (Disha), delivered to clients operating globally.

Shareholding Pattern: Recent Developments

The Company continues to improve its record of flawless delivery, and has implemented Project Insight, a new and powerful Project Management tool. This tool enables enhanced global collaboration between the clients and the delivery teams and reduces time and distance barriers and improves operational visibility.

Aztecsoft’s Bangalore development center were assessed at the highest level of 5 and is a reflection of its ability to consistently apply Quantitative, Project and Process Management techniques to its Services.

The Company launched a set of Expert Services – such as Performance Engineering, Security Engineering, System and Database Architectural Services etc. These services have been created out of the vast xperience and expertise your company has developed over the several years of focus on select technologies and product engineering services. In a rapidly-maturing and competitive software products market, such services become very attractive to clients, who are looking to showcase better value for their products.

Aztecsoft announced its entry into two new Technology segments this quarter -Wireless & Networking Technologies and Embedded & Devices technologies. A few clients engagements have concluded successfully and growth of these initiatives appear bright. During this year Aztecsoft added 20 new clients with a good mix of small and large clients. The total active client count increased to 72 at the end of March 3 1, 2006.

Significant investments have been made on infrastructure to meet the current and future growth of the company. The Company’s development centers and Test Labs are spread across Bangalore, Pune, Hyderabad, Santa Clara and Seattle.

Industry Overview

Global Scenario

The worldwide market for InfoTech products and services was estimated at $2. trillion in 2005, according to IDC (International Data Corporation). Growth in this sector picked up considerably in 2004-2005, as the global economy rebounded from the recession of the early 2000s and organizations increased IT budgets in order to purchase new systems, software and services. Software alone was about a $200 billion global market in 2005. Hardware and peripherals were about an $800 billion global market (about 200 million PCs were sold in 2005), while computer services were worth about $1 billion.

Worldwide sales of chips grew to about $235 billion in 2005, up from $218 billion in 2004, thanks to very strong demand from makers of everything from iPods to cell phones to PCs. In the U. S alone, spending on information technology for 2005 was about $416 billion, up about 7%. The GIT report ranks nations on the basis of how good they are at exploiting global IT developments and takes into account the following: affordability of Internet access, telephone connection charges, and quality of mathematics and science education, government prioritization and procurement of ICT.

The US maintains global leadership in the business readiness component of the rankings as well as in variables such as the quality of its scientific research institutions and business schools which have no match in the world — and the availability of training opportunities for the labor force as well as the existence of a well-developed venture capital market, which has spurred innovation. Singapore ranked second in the GIT report, which is primarily due to its superior performance in terms of the ability of individuals and government to tap the potential of ICT, as well as actual government usage of ICT.

Singapore’s remarkable performance is a consequence of the government’s consistent and continuous efforts in fostering ICT penetration and usage, as well as the quality of the country’s educational system and its able use of foreign technology.

Indian Scenario

The vision of Information Technology (IT) policy is to use IT as a tool for raising the living standards of the common man and enriching their lives. Though, urban India has a high internet density, the government also wants PC and Internet penetration in the rural India. The annual growth rate of India’s software exports has been consistently over 50 percent since 1991.

No other Indian industry has performed so well against the global competition. According to a NASSCOM-McKinsey report, annual revenue projections for India’s IT industry in 2008 are US $ 87 billion and market openings are emerging across four broad sectors, IT services, software products, IT enabled services, and e-businesses thus creating a number of opportunities for Indian companies. In addition to the export market, all of these segments have a domestic market component as well.

It is expected that the industry will generate a total employment of around four millions peoples, which accounts for 7 per cent of India’s total GDP as in the year 2008. Software exports has major share in India’s total exports. As of the year 2004-05, both software and services revenue grew by 32 percent to $ 22 billions and $ 28. 5 billions in 2005-06. According to NASSCOM, India’s domestic market grew by 24 per cent. Presently Indian companies have concentrated on only two largest IT service markets. They are USA and the UK. Even Canada, Japan, Germany and France represent huge growth potential in the industry.

The off shoring momentum continues unabated. Indian companies, with their global delivery capabilities, execution skills, skilled human resources, low cost base and unique location, continue to grab the largest share of the pie. Going forward, the broad trend in the industry globally has been that deal sizes are getting smaller. This has suited the Indian industry perfectly, as they do not as yet have the capabilities, scale and resources to execute huge billion dollar deals, which require a lot of upfront investments and have proved to be a drag on profits and margins for the MNC companies.

However, as far as the global software products business is concerned, it is a totally different story. There are very few Indian product companies. Infosys, TCS and Geometric have their own products, but they do not form a major share of their business. Globally, the software products industry, given its nature, is not as fragmented as software services. Large investments in research and development (R&D), sales and marketing (S&M) and sustained product development are required to keep the product relevant and better than the competition.

Therefore, companies like Oracle, Microsoft and SAP globally dominate the products market in their respective spheres. Budget 2006 to hit software industry adversely: Eight percent excise duty has been imposed on packaged software; additionally service tax has been increased to 12%. This is bound to have a negative impact on the growth of the Indian software industry. Commenting on the implications of the Union Budget, Mr. Kiran Karnik, president NASSCOM said “Increase in levies on packaged software and on IT hardware will result in higher prices and have an adverse impact on millions of customers and on the domestic IT market.

It will be a setback to efforts to promote IT utilization in the Indian economy and for vital applications like education and health. ” According to a recent study by the International Data Corporation, a reduction in the software piracy by 10 points can have a significant impact on India’s economy. It will add 115,847 jobs; contribute $5. 9bn to GDP, $386mn in taxes and $8. 2bn in revenues to local vendors. ” India has become an R&D hub for IT software services sector. A plethora of opportunities have sprung up in recent years, making it one of the most viable destinations for R&D activities. R&D snapshot – India Google, the world’s largest search engine, has set up an R&D centre in Bangalore

  • Leading web portal Yahoo also carries out R&D work in Bangalore
  • US-based chipmaker Intersil is setting up a design centre in Bangalore
  • IBM has set up a research lab in Delhi to tap Indian talent; it is one of eight such labs in the world. It has 70researchers in India.
  • Mobile phone giant Nokia plans to set up a R&D hub in India
  • Indian Institute of Science, Bangalore, and the Indian Institute of Technology, Mumbai, has been commissioned to set up nanotechnology centers with a total outlay of US$22m over a period of five years

Outlook

Though the volume of software business is low compared to other global giants, it must be noted that the IT spending and staff recruitment by businesses and government departments in India is increasing at higher rates than North America, Europe and Asia-Pacific countries. The silver lining is that Indian software firms are already being invited to bid for contracts such as the ABN Amro deal for TCS and Infosys, and the General Motors contract for Wipro and indirectly Satyam. A major share of revenues flow in from contracts like these.

Future Outlook

The company Aztec Software has a bright future. Company basically deals with roviding technology services for building products. This Outsourced Product Engineering market segment continues to be robust and is in line with predictions from various bodies. Gartner projects this market to be worth $8 billion in 2010. The outsourced testing market is predicted to be worth another $8-10 billion by 2010 as well. Nasscom predicts the OPD market will generate revenues of US$ 8-11 billion by 2008-10 from the current levels of $2-3 billion annually. Company has also commenced building for the next phase of growth, introduced new technology-based solutions and expanded its management team to help it grow further.

It continues to make investments in several new technology-based services and technologies such as Web 2. 0, SaaS, SOA, WiMax etc and is working with its clients to architect and implement the next generation of products. The company continues to leverage its deep technology strengths in Data Management, Quality Engineering to build industry-specific and technology-based solutions for enterprise customers. Aztecsoft’s mission is to build deep relationship with our clients on a long-term basis to enable us to be a strategic partner for software life cycle services.

Company’s focus on technology, very high levels of expertise in all the major technology platforms that matter to software companies, enhanced service offerings to its customers and aggressive growth plans will make Aztecsoft an exciting company for its employees, customers, investors and other stake holders.

Valuation

Assumptions: (take year as 2010, 2011, 2012, 2013)

  1. Seasonal and yearly fluctuation has been circumvented by taking a weighted average of income and expense over a three year period. However, more weightage has been given to recent happening.
  2. For risk-free return we have taken 364 day treasury bills yield which is 7%.
  3. After 2009, the Free Cash flow shall grow at 5%.
  4. The company is under Tax holiday till 2009.
  5. Net investment takes into consideration the investments made for getting operational performance and does not include the investment made in subsidiaries.
  6. Final value is arrived at by giving 70% weight to fundamental value and 30% weight to relative value as present market price of the share has shown a lot volatility in the recent past

Aztec Software is ranked 11th in the Top 25 Great Places to work in India. It is amongst the World’s 100 Most Innovative Service Providers.

Product development outsourcing is slated to become a big wave in outsourced IT services. Product companies are not looking for just programming services. They are looking at partners who can add significant value to them in terms of process efficiencies, build products faster and better, and create more services around outsourced product development.

Clients therefore want to partner with Outsourced Product Development (OPD) providers who will input the complete product development life-cycle services and also provide exclusive on- demand services which would help engineer a product in a better way.

Aztec software is a specialist in this space and is better positioned than competition to partner with many of the top software companies.

Aztecsoft’s Bangalore development center were assessed at the highest level of 5 and is a reflection of its ability to consistently apply Quantitative, Project and Process Management techniques to its Services. The Company launched a set of Expert Services – such as Performance Engineering, Security Engineering, System and Database Architectural Services etc. In a rapidly-maturing and competitive software products market, such services become very attractive to clients, who are looking to showcase better value for their products. • Aztecsoft announced its entry into two new Technology segments this quarter -Wireless & Networking Technologies and Embedded & Devices technologies.

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