Sasken's survival struggle

Rajiv Mody, the beleaguered Founder-Chairman and CEO of Bangalore-based Sasken Communication Technologies, got yet another shock recently. Hari Iyer, Sasken’s HR Head, who had been with him since the day he had set up Sasken 20 years ago, had put in his papers. Over the past few months, Mody had seen a host of top managers head for the exit and the share price head for the pits even as he grappled with the market regulator to clear a buyback and pleaded with edgy customers to hang on. The normally even-tempered Mody finally lost his cool and had a furious exchange with his remaining managers as he looked for ways to reignite growth.

Cut to late 2005, it appeared then that Sasken, which provides software services and products to the communication industry, could do no wrong. On September 20 that year, the company’s stock sizzled on debut, listing at Rs 400, a 54 per cent premium to its Rs 260 offer price and the issue was oversubscribed eight times. In the next few months, the stock soared above Rs 600 and had investors scrambling to get aboard.

Three years on, one indicator tells all: Sasken’s stock was trading at around Rs 60 levels in late November (it closed at Rs 57.20 on November 19, down 84.54 per cent from the 52-week high of Rs 370 it hit on April 1 this year on the BSE. The firm had wrapped up a Rs 15.5 crore share buy-back to try to prevent a further erosion in its share price. Sasken’s woes began in 2007, when most of its usercompanies— mobile handset manufacturers and service providers— were forced into consolidation mode and began opting for operating systems from the likes of Microsoft (Windows), Symbian, Apple and most recently Google (Android). Sasken, which was building its own software package, found itself out in the cold.

Consolidation Setting In
“Consolidation has completely changed the contours of the communication market,” says Mody. And what a consolidation! Lenovo, which had partnered with Sasken to enter the mobile handsets market, suddenly decided to pull the plug on the project in the face of strong competition from existing players such as Nokia (incidentally, Sasken’s #1 customer), Samsung and Sony Ericsson. An initiative, called E series, which was to build a software platform for mobile handsets, was trashed. “We had spent Rs 40 crore on this initiative,” says Mody. CFO Neeta Revankar adds a touch wistfully: “Perhaps, we were a little late in this investment.”

As competition intensified and the consolidation continued, Mody tried to hang on to customers by selling them significant stakes in the company, diluting up to 9-10 per cent to the likes of chipmaker Intel, Nokia and Canadian Internet gear maker Nortel. But with user industries beset by their own problems (Philips’ spin-off NXP Semiconductors, STMicro and Ericsson, for example, talking about an alliance to build enough scale to survive), it was inevitable that Sasken also caught the virus. “Our customers are taking longer to decide on projects, spending less on R&D and rationalising their (IT) vendors,” admits Mody.

Customer Turmoil
Nokia cashed out its investment in the company in the middle of this year and moved several projects to its captive centres. The flux in the handset market, with one-time hotshot Motorola getting overshadowed by Samsung and Sony Ericsson over the last couple of years, gripped Sasken also. “There is no certainty in the market today,” grumbles Revankar, adding: “We need to be conservative and hope the gloom lifts sometime soon.”

Before that happens, Sasken will need to quickly find new markets to sustain its growth. Already the numbers are looking ominous, with margins and profitability shrinking and attrition soaring. Sasken’s net margins had dropped to just 5.88 per cent in the second quarter of 2008-09, from 10 per cent a year ago. While this number slumped to as little as 2.73 per cent in the third quarter of last fiscal, it improved for three consecutive quarters before dropping alarmingly again. Revankar blames the yo-yo margins on unpredictable forex movements. “Twelve months ago, the rupee was at Rs 39 to the US dollar, today it is Rs 49; we had hedged at Rs 41-42. We have decided to focus on the business risk and not on the accounting risk.”

Slumping Growth
This bravado is unlikely to help Sasken tide over its current challenges. With the market worsening, the company reduced its growth estimates from 25 per cent to just 10 per cent this year. “We will also focus on services where the revenues are more predictable, but we hope to gain some royalties from some of our products,” says Mody. The reduction in growth target certainly seems to have caught the attention of analysts. “The revised guidance implies a single-digit growth rate in dollar terms for H2. If the current environment sustains and we assume slight rupee appreciation with no major recovery in dollar growth, Sasken would face increased cost pressures which could possibly lead to negative earnings growth in FY10,” says a note issued by PINC Research.

This slowing growth is also likely to hurt Sasken’s ability to attract and retain the best talent in the industry. Rated among the best companies to work for (including BT’s employment survey), Sasken reported an attrition of 30 per cent for the second quarter, almost double the figure for frontline IT companies (15-20 per cent). What’s worse, Sasken has lost several top executives, including senior marketing people like Swami Krishnan and Ranganathan Sundaram, and US Delivery Head Santosh Xavier, over the past few months.

Hari Iyer

Products in Peril
Part of the problem for Sasken has been the slower-than-expected growth of its products business, although Revankar discounts this factor. “Revenues from the products business are difficult to predict and we should not seek future trends from past data. The products business continues to be a source of differentiator for us and we will leverage it as best as we can,” she claims.

From licensing its products to handset makers, semiconductor companies and network equipment manufacturers, Sasken has also changed its focus to royalty payments to try to boost this flagging business. Sasken earned around Rs 7 crore in royalties in the second quarter of the current fiscal, compared with Rs 1.5 crore in the same period of the preceding year.

To try to ensure some predictability in revenues, Sasken is shifting from its productled strategy to an increasingly services-oriented one. “Sasken doesn’t have the sales and marketing muscle and financial wherewithal to play in the products market yet,” explains one analyst. On the other hand, Sasken may find services a tough nut to crack, as scale is critical and increasingly complex deals are being contracted out. Sasken itself acquired a Nokia development centre in Bochum, Germany, in February this year, but it may not have the financial muscle to pursue more such deals. “Sasken has just 3,500 people overall and is barely adding 100-plus people a quarter. With just Rs 80 crore in the bank (compared with Infosys’ Rs 10,000 crore, for example), Sasken may be hard pressed to compete for big deals,” says a Wipro executive.

Neeta Revankar

Third Coming
However, Mody isn’t just looking at plain-vanilla and large-scale services dominated by the Tier-I players. “We now want to make a transformation to provide next generation services around the mobile phone such as location-based services and social networking. First generation services such as ring tones are already extremely commoditised,” says Mody. Sasken is also building its India business, focussing on areas such as network benchmarking, in association with ACNielsen, and looking at mobile enterprise applications. “We want to slowly steer Sasken in a new direction over the next 12 months,” says Mody. Unlike previously, when Sasken bought its way into new markets with iSoftech and Botnia, its lean cash position and difficulty in raising fresh funds also means it will have to use the slower, organic route and build these skills in-house.

Already, some industry watchers question the overreliance on handsets at a time when some chipmakers such as Freescale, a Motorola spin-off, are actually getting out of the market. “We are unsure about the kind of visibility Sasken has over its revised growth rates as it is banking on unchanged growth in the handsets segment to achieve its guidance. Hence, a continuation of a sluggish economic environment into the next few quarters leaves open the possibility that clients in the handset segment could potentially delay decisions/spends,” the PINC Research note warns.

Mody, an electrical engineer, started Sasken from a garage in Freemont, California, back in 1989 and now there are those who reckon Sasken’s best bet may be to sell out, to either a large global IT player or in a private equity-led transaction. Mody retorts: “Sasken foresees a future as a stand alone company for many more years.” But Sasken—with 20 patents to its name and 41 filed for, a strong focus on a single industry (communications)— may not be able to ward off eager buyers much longer, especially with the likes of Infosys (which has denied these reports) previously figuring among its suitors.