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BW Businessworld

Clawing Its Way Out

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For a company that recorded a net profit of close to Rs 74 crore on a revenue of Rs 546 crore in the last fiscal, the word ‘crisis' would seem inappropriate. But that is exactly what Bangalore-based telecom software solutions company, Sasken Communication Technologies (Sasken) is facing — an existential crisis. This is its second brush with death in 22 years, as it struggles to adapt to a vastly changed technology landscape over the past two years.

For one, it tied itself seamlessly with Nokia, whose fortunes as a phone maker are now on the decline. Then, network equipment maker Nortel collapsed. Texas Instruments, one of its top 5 clients, exited the wireless modem business. Finally, semiconductor companies such as ST Microelectronics and Qualcomm were severely affected by the global downturn.

Historical Baggage
In its current avatar, if revenue was the sole criterion, Sasken would struggle to make the cut even as a mid-tier IT services player. But the company punches above its weight in visibility and perception, because of its much-storied founder and the promise the company used to hold. Rajiv Chandrakant Mody, 53, founded the original garage startup in the Indian IT context. He incorporated Silicon Automation Systems (SAS) with two others in 1989 in a garage in Fremont, California, after studying in the US and working with AMD and VLSI Technology.

From Silicon Valley, he moved the company to India's Silicon Alley, Bangalore, and SAS morphed into Sasken. After the other co-founders left, Mody single handedly steered its fortunes. While most Indian IT companies stuck to the tried and tested traditional IT services formula of offering everything under one roof, Sasken bravely chose to go with just one segment — telecom. Also, initially, it got over half of its revenue from products and product solutions, a rarity for an Indian IT company.



Any mobile phone user is likely to have interacted with a Sasken product or solution. If the network infrastructure used was from Nortel, Ericsson, Alcatel or Lucent (almost 90 per cent of the global market at one point), Sasken played a part in it. Or if you have ever used a Nokia, Samsung or Sony handset, there is a high probability of Sasken being in it. Even chips designed and embedded in devices such as modems — be they from Texas Instruments, ST Microelectronics or Qualcomm — Sasken had a finger in that pie too. It also partnered with major telecom operators across the globe.

Sasken's focus on the telecom and semiconductor markets helped it build expertise and in-depth knowhow in chip design, handset services, wireless infrastructure, network engineering, data networks, hardware design and testing, apart from convergence technologies. Given the razor sharp concentration on these segments, and the relationships the company built with some of the best companies across the globe in these areas, Sasken attracted investment from Intel Capital and Citi Group, which collectively picked up 10 per cent stake for $10 million. Sasken was hailed as the ‘next big thing in Indian IT' by industry analysts and observers. Its protocol stacks, chip designs, video codecs, multimedia subsystems and firmware were used throughout the telecom eco-system. It regularly featured as one of the best places to work in. This was even before the company went public in August 2005 at Rs 260 a share, in an issue oversubscribed 78 times.











SASKEN'S SLIPPERY SLOPE
ISSUE: Sasken's biggest customer — Nokia (20 per cent revenue share) — is in trouble. Nortel, which used to contribute 10 per cent, went bankrupt. Texas Instruments exited its commercial wireless chipset business
SOLUTION: Widen customer base; get into new verticals such as automotives, satellite communication and consumer electronics

ISSUE: Nokia gave up its Symbian platform, which Sasken was supporting. Motorola, too, had earlier quit Symbian
SOLUTION: Bet big on Google's open source Android platform; work with multiple handset vendors

ISSUE: European and North American network equipment vendors are declining, while Chinese players are on the rise
SOLUTION: Move out of some segments of network equipment business; build partnerships with Chinese companies

ISSUE: Top six customers — Nokia, Texas Instruments, Samsung, Qualcomm, Sony Ericsson and Kapsch — account for 60 per cent of revenues
SOLUTION: Try to reduce revenue concentration by growing other customers

ISSUE: High attrition at 30 per cent and low manpower utilisation at 65 per cent
SOLUTION: Improve utilisation; reduce attrition as new projects come in

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Leveraging the hot and happening telecom sector during 2004-09, Sasken's topline grew at a compounded annual rate of nearly 24 per cent. And then came a series of setbacks.

The Challenges
In 2007, when Apple introduced the iPhone, Nokia was the king of the handset market, and its Symbian platform dominated. Sasken was so deeply embedded in Finland-headquartered Nokia that in order to service its single-largest customer better, it even acquired Finnish firm Botania Hitech (which made customised telecom solutions) for about $45 million (equivalent to two-thirds of its revenues) in 2006.

While the acquisition helped strengthen its technical expertise, it also dangerously tied the company's fortunes to the Finnish giant with 20 per cent of Sasken's revenues coming from just Nokia. Now Nokia is an also-ran in the new smartphone wars — dominated by Apple's iPhone and iOS, and Google's Android.

Nokia has officially abandoned Symbian (though it says it will continue to support it till 2016 and will use it in low-end phones) and hedged its bets on Microsoft's Windows Phone 7. Moreover, Nokia has also announced that it is moving all Symbian-related work to Accenture. Earlier, another Sasken client, Motorola, had left Symbian for Android (Google acquired Motorola last month). Mody claims that none of Nokia's contracts with Sasken, which run till December 2011, have been cancelled.











NEETA REVANKAR, CFO, SASKEN "We drove allround efficiencies into our system while streamlining our operations"

What stumped Sasken more than over-dependence on one customer was that it misread the signs that were pointing towards applications and the cloud. "Sasken's troubles are a mix of self-inflicted injuries and global developments over which it had no control. They were so invested in their relationships with what used to be the No. 1 handset vendor, and another network vendor, that they refused to read the signals early. Even when they tried to imitate a MediaTek strategy (a Taiwanese fabless semiconductor company whose designs go into most low-end Chinese manufactured phones), it did not work. However the company has deep technical knowhow and a decent IP portfolio. It comes down to leveraging existing strengths and adapting to new requirements," says a vice-president in the telecom division of a Tier 1 Indian IT company. A chastened Mody now admits that "companies could fail by listening to customers too much".

While Sasken boasts of nearly 136 clients, the top six account for nearly 60 per cent of its revenues. "Such a thing is not unusual… in the kind of markets we operate in," says Mody.

Apart from the strategy mistakes, there were other factors that were not in the company's control. Nortel, a network equipment vendor that used to contribute 8-10 per cent of the company's revenues till 2008-09, imploded when it was unable to face the onslaught of Chinese players such as Huawei and ZTE. While different parts of Nortel's business have been acquired by the likes of Avaya, Ericsson and Kapsch, they have not been a revenue replacement for Sasken.

Unlike North American and European telecom infrastructure companies, which outsource parts of their requirement, Chinese companies prefer to keep the entire value chain in-house.

There were other setbacks as well. Texas Instruments exited its wireless modem business, which was a major revenue generator for Sasken. Then the global downturn rattled semiconductor companies such as ST Microelectronics and Qualcomm, another key segment for the company.

Looking For A Solution
But Mody has not called it quits. As part of its revival strategy, Sasken is now trying to reduce revenue concentration by growing other customers. It is also widening its customer base by getting into newer verticals such as automotive, satellite communication and consumer electronics segments. "We are leveraging our domain competencies in communication and media processing to springboard into spaces where connectivity and video is becoming increasingly pivotal," says G. Venkatesh, director and chief technical officer at Sasken. "Connectivity to the cloud is becoming a necessity for several devices used in auto electronics, consumer electronics, retail and healthcare; and along with this, the need to acquire and deliver richer and dynamic forms of data."

The company is now betting on the Android platform, and working with multiple handset vendors, including Samsung, Sony Ericsson, HTC and Motorola. Swaminathan Krishnan, the company's former chief marketing officer and now a consultant to Sasken, says, "We will not be doing consumer applications, but we will work for the handset and network vendor parts."
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Sasken is also trying to get out of certain segments of network equipment business, while it builds partnerships with major Chinese companies. Neeta Revankar, Sasken's chief financial officer, admits that the recent period was challenging. "But we drove all-round efficiencies into our system while streamlining our operations, ensuring that we also prepare for our revenues to regain healthy traction."

Mody says the effort is to move away from being a mere component seller to becoming a complete solutions vendor. Also, from a purely telecom focus, the company has decided to have a more horizontal view and wants to leverage existing domain knowledge to build products and solutions for market segments such as retail, medical, auto, consumer electronics, satellite and defence.

But cracking these new markets will not be easy. For instance, in early 2007, it floated a joint-venture (JV) with Tata Autocomp to produce electronic products in telematics, infotainment and occupant convenience. The 50-50 JV closed in 2009. "There will be some setbacks. However, Connect M (a machine-machine enabled solutions company), which we floated with IDG Ventures, has been doing well," says Mody.











G. VENKATESH, DIRECTOR & CTO, SASKEN "We are leveraging our domain competency in communication and media processing"

Today, services, and not products, form almost 95 per cent of the company's revenues. Sasken has applied for 51 patents, of which 30 have been granted. The company expects royalty revenues from products to accelerate over a period of time.
Apart from growing the business, the company has to tackle the twin challenges of high attrition and low employee utilisation.

Sasken, which had 3,413 employees in June, had an attrition rate of 34 per cent — way above industry average. Employee utilisation was a mere 65 per cent.

PINC Research, in its note after the quarterly numbers were released, stated: "There is no clarity on the sustenance of the existing business from Nokia. Also, the smaller clients have shown decline, which adds to revenue concern and reduces visibility on sustainable revenue run rate. Continued high attrition adds to execution issues and loss of talent. Though it has cash and equivalents of Rs 188 crore, lack of certainty from top clients and poor growth from smaller clients reduces revenue visibility."

While the company has actually increased its net profits by nearly 70 per cent in the past two years, its revenue base has actually shrunk by a fifth. A former senior company executive says, "Morale is low. Rajiv needs to delegate and communicate more. Cost management can take you only so far. Otherwise, growth will be hindered. While it may continue to be a profitable company, it will remain small. Sasken's original ambition might not be realised."

Mody, however, seems sanguine that these problems will be addressed. "We underwent a near-death experience even in 2001-02 following the dotcom bust. We had just then exited the safe EDA (electronic design automation) business, which was, however, not a strategic fit. There was a global meltdown. We publicly announced a paycut of 20 per cent for our employees. We survived then and went on to thrive. Our people are our biggest strength. I see no reason why we cannot repeat that. We are in a stronger position today."

While talk of Sasken being a possible acquisition target abounds, Mody pooh-poohs such theories given the company's niche focus and IP portfolio. "I have not sold a single share of Sasken since its inception," he says. The promoters hold about 29 per cent of the company, which has cash reserves and equivalent worth about Rs 188 crore that could be used for acquisition(s) if required. In either case, all stakeholders will be hoping that Mody can return Sasken to the growth path again.


Click here to read interview with Rajiv Mody, chairman and MD, Sasken Communication

venkatesha(dot)babu(at)abp(dot)in

(This story was published in Businessworld Issue Dated 10-10-2011)