Aztec Software and Technology Services: Clock Turns Full Circle

Among the thousands of companies started in the dotcom era only a handful
survived. Unrealistic business models, excessive funding and poor management
were the key reasons for their failure. However, across the world there are a
few shining examples of companies which survived the dotcom bust and are now
reaping the benefits of the upturn in technology markets, in general, and growth
in e-business areas.

In India too there are a few companies that have withstood these trying times
and are now expanding their operations to meet increased demand for their
services. Some of these have been acquired by global corporations such as
Jobsahead by Monster and Baazee by Ebay. Others like Rediff and Sify have
acquired other companies or raised capital to reach significant milestones in
their business. Among the few companies that went public during the dotcom era
and had a large exposure to internet related technologies, was the Bangalore
based Aztec Software. Having been through a tough time in the last couple of
years, the company is now back on the road to profits. While Aztec remains a
mid-market company, the specific niches it operates in and a strong management
team could ensure its long term survival in the software services space.

Aztec Software and Technology Services (Aztec) is a provider of software
technology services to web based service and software product companies. The
company is based in Santa Clara, with offices in Boston and London. Founded in
1996 the company went public in November 2000 and currently has an equity base
of Rs 11.7 crore: with promoters holding 54%, Indian public holding 21%,
institutional investors holding 4% and others holding the balance 21% of the
stake. K B Chandraseker is the chairman of the company and V Chandrasekaran is
the managing director and CEO.

Aztec is engaged in e-business transformation, e-engineering and co-product
development, providing e-engineering solutions with expertise in core database,
data warehousing, infrastructure and Java technologies. The company operates in
high technology areas, the major business areas being ASPs, on-line exchange,
product co-development, net-centric technology, systems integration for ASPs and
corporate web-enablement. Aztec has global delivery model with four offshore
development centers, the latest one recently started in Bangalore.

For the financial year ended March 2004, Aztec reported disappointing results
with revenues amounting to Rs 41.4 crore, a 6% decline as compared to Rs 43.9
crore last year. Offshore activities continued to be the biggest contributor 77%
of the annual revenues with amounting to Rs 31.9 crore, whereas the onsite
revenues were Rs 9.5 crore with a 23% contribution. The net profit for the same
period stood at Rs 1.3 crore, as compared to a loss of Rs 4.2 crore.

Aztec launched a cross-language compiler application tool, which has been
built using Microsoft NET platform called J2CS to convert Java to C#. Aztec with
Embarcadero Technologies has formed a joint venture to provide application and
database lifecycle management solutions. The company is currently focused on ASP
model. Few of Aztec's clients are Microsoft, Candence, JD Edwards, Ingenuity
Systems, Novell and Netopia.

The
company's results for the third quarter ended December 2004 continued showing
healthy revenue growth amounting to Rs 25.6 crore, a 26% sequential rise as
compared to Rs 20.3 crore and an increase of 146% as compared to the same
quarter last year. The net profit grew 21% sequentially at Rs 4.7 crore as
compared to Rs 3.9 crore in addition to a steep 2013% rise y-o-y. Revenues from
off shore and onsite activities contributed 84% and 16% of the quarterly
revenues. Both the activities witnessed decent growth, wherein revenues from
offshore, activities amounted to Rs 21.5 crore as compared to Rs 16.7 crore, up
29% sequentially and Rs 8.2 crore, up 163% y-o-y. Revenues earned from services
rendered on site amounted to Rs 4.1 crore, up 12% as compared to the immediate
previous quarter and up 83% as compared to Rs 2.2 crore in the same quarter last
year. Four new clients were added during the quarter ended December 2004, a
similar number in the previous quarter, taking the active client base to 44. The
company added 492 employees during the quarter, taking the total to 1233, which
includes 409 employees of the recently acquired Disha technologies and has an
attrition rate as low as 6.5%, which is a good sign for the company.

In December 2004, Aztec completed the acquisition of Pune based Disha
Technologies India, which is now a 100% subsidiary of Aztec and is a provider of
engineering and consulting services for software testing and quality assurance.
The former paid $12.1 mn, with $9.6 mn in cash and $2.5 mn in stock for the
acquisition of all the shares of Disha Technologies.

Aztec plans to open a branch or a subsidiary in Europe in order expand into
the European market with the aim of expanding market segments, service and
technology offerings. The company plans to provide total technology solutions
and build solutions for critical application of clients by combining on-site and
ODC advantage, with the ultimate aim of reducing time to market.

Aztec is currently traded at Rs 64.3 discounting the projected March 2005 EPS
by 16 times and March 2006 EPS by 10 times. Going ahead, we expect Aztec to grow
its revenues at 120% in FY05 and 65% in FY06, wherein Disha Technologies is
expected to play a significant role catering to the testing and QA market. The
company's operating margins are expected to improve as the company is on a
client acquisition spree. While the operating margins are expected to grow from
2% to 21%, we expect the profits to grow by 18% and 17% in the next two fiscals
respectively. Aztec operates in certain niche areas where it has developed
strong skillsets and client lock-ins, to ensure continued growth. Consequently,
despite it's mid market status, we believe that the company has promising
future ahead.

Market Outperformer.

Sushanto Mitra The
author is the founder of Technology Capital Partners The views reflected here
are of the author and not of this publication. No liability is accepted for
losses based on the information presented here