The Hindu Business Line : i-flex solutions: Hold

Considering the strong licence fee order-book, good momentum in the product business and the possibility of the stock settling higher ex-bonus, shareholders may hold the stock at current price levels.

The sustained impact of the non-linear revenue model was evident in the financial performance of i-flex solutions (i-flex) in the first quarter ended June 30, 2003.However, despite a robust growth in revenues, i-flex has slipped up on net profits compared to the quarter-ended December 31, 2002 (its best quarter for 2002-03) on account of several factors. In the non-linear revenue model of i-flex, with a sharp product focus, say, for every one per cent rise in revenues, generally there is a disproportionate rise (higher than one per cent) in net profits.

The salient features of the performance, which highlight this factor, are as follows:

On a consolidated US-GAAP basis, i-flex (and its subsidiaries) have recorded a 14.3 per cent rise in revenues to Rs 186.5 crore and a 17 per cent jump in post-tax earnings to Rs 38.7 crore for the quarter ended June 30, 2003 on a sequential basis. But this growth has to be seen in the light of the 6 per cent drop in revenues and a 44 per cent decline in post-tax earnings in the previous quarter ended March 31, 2003.

Compared to the quarter ended December 31, 2002, in the latest quarter, revenue growth at 7 per cent continued to be strong. But the post-tax earnings at Rs 38.7 crore was considerably lower than Rs 58.8 crore clocked in the December quarter.

On a sequential basis, the operating profit margins (OPM) of i-flex improved only marginally by 0.94 percentage points to 26.98 per cent. Compared to the December quarter, the latest OPM dropped sharply by 8.63 percentage points. This drop is attributed to the steep rise in selling and marketing expenses to address new market opportunities and higher general and administrative expenses.

Delving a little deeper, the segment and operational highlights of the performance are:

The products business accounts for 65 per cent of the total revenues of i-flex. The customer additions for FLEXCUBE, its flagship product, continue to remain fairly strong. In the latest quarter, it has added nine new customers compared to 12 new customers in the March quarter. Similarly, the unbilled licence fee revenue for products in the latest quarter also was fairly high at $34 million vis-à-vis $ 37 million in the previous quarter. Though the licence fees contributed 37 per cent of the company's product revenues, up from 19 per cent in the previous quarter, there is further scope for increase in this contribution. And it is likely that increases from this type of revenue over the next couple of quarters will have a significant impact on the post-tax earnings of i-flex.

However, on a relative basis, the performance of the software services business has been slowing the overall growth momentum of i-flex. The operating margins of this business continues to be dogged by pressure on billing rates and changes in the composition of business. And there has been a substantial drop in the fixed-price project revenues to 13 per cent from 30 per cent on a sequential basis. The contribution of Citigroup and its entities, which had steadily come down through 2002-03, went up again from 61 per cent to 69 per cent on a sequential basis.

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