GEOMETRIC SOFTWARE SOLUTIONS: Against All Odds

The recent result announcement of software services companies has lead to a
re-rating of almost the entire software sector.

The billing pressures and increased competition has affected the margins and
bottomline of most of the IT consulting and services companies. Geometric
Software Solutions has however remained largely unaffected by this trend and
infact improved its operating margins. Geometric was a part of the Electronic
Business Equipment division of Godrej & Boyce Manufacturing Ltd. The
division’s major activities were manufacturing and marketing electronic
equipments and later on commenced operations to manufacture electronic
typewriters, dot-matrix printers, workstations, and CAD/CAM software. The
CAD/CAM activities were spun-off as a separate company in 1994 to focus on these
strengths. Geometric came out with its initial public offer of 1,310,000 equity
shares at a premium of Rs 290 per share in January 2000.

Geometric provides comprehensive solutions in the areas of CAD/CAM/CAE/PDM
and Collaborative Engineering (CCCP).

The company provides project services, component technology and OEM
applications to global mechanical design and manufacturing markets. These
services are provided through its three strategic business units namely
Geometry, Information Management and Collaborative Engineering.

On a consolidated basis, Geometric posted revenues of Rs 84.12 crore in the
year ended March 2003. Net profit of Geometric was up by 33% to Rs 17.06 crore.
The company’s operating margins improved from 23% in fiscal 2003 to 27% in
fiscal 2003 largely due to its fourth quarter performance. Geometric achieved
85% of the revenues from projects and the balance came from products. Product
revenues grew 25% to Rs 12.21 crore during the year. The company reduced its
dependence on the US market during the year with share of revenues from the US
declining from 86% in fiscal 2002 to 70% in fiscal 2003. European revenues went
up from 10% to 25% due to the increased focus of the company in this region
through joint marketing arrangements.

Geometry has been in the traditional business of Geometric and continues to
be the largest revenue contributor. The geometry business unit builds licenses
component technologies; provides project services; builds OEM products to
CAD/CAM/CAE vendors. Its key technology is the Feature Recognition Technology,
which automatically recognizes features in solid geometry.

The company’s other technologies include Nestlib and FX and the company
business unit provides services in the area of Multi Surface Machining Library
and CATIA V5 CAA services.

The information management business unit provides development and
implementation services to the PDM/PLM/CPC/B2B software vendors and industrial
customers. The collaborative engineering business unit provides Internet based
software solutions in collaborative design and manufacture including solutions
for collaborative visualization and 3D modeling over the Internet.

Geometric is based in Mumbai and has offshore development centers in Mumbai
and Pune and offices in US, Germany, Japan and Singapore. The company has two
subsidiaries in the US and Singapore and a Joint Venture with PLM Software
Solutions–3D PLM Software Solutions in which Geometric has a 70% stake. The
operations of 3D PLM stabilized in the fourth quarter of fiscal 2003 and its
employee strength increased from 35 to 160 during the year.

In the fourth quarter ended March 2003, Geometric reported consolidated
revenues of Rs 22.63 crore and net profit of Rs 3.76 crore, up by 30% and 28%
respectively. On a sequential basis, revenues were up 3% whereas the net profit
was down 19%. Operating margins in the fourth quarter improved to 30% from 23%
last year and 28% in the immediate previous quarter. Revenues from products were
up 9% y-o-y but down 15% q-o-q to Rs 2.69 crore due to the slowdown in the PLM
Software product market. Revenues from projects were robust and were up 33%
y-o-y and 5% q-o-q to Rs 19.71 crore. Onsite revenues as a percentage of
total revenues stood at 10% in the fourth quarter ended March 2003 compared to
9% in the immediate previous quarter and more than 11% in the fourth quarter of
last year. The increase in the onsite revenues in the fourth quarter was due to
new onsite projects initiated during the quarter. Geometric added 15 new clients
during the quarter out of which five were industrial customers and the share of
revenues from these increased from 10 of total revenues in the fourth quarter of
previous year to 15% of the total revenues in quarter ended March 2003. GBU
contributed 55% to the total revenues, and IMBU 36%, whereas CEBU’s share was
11%. The company’s employee strength went up from 439 in March 2002 to 571
employees at the end of fiscal 2003.

Geometric’s growth strategy is to partner with leading software companies
and offer the niche services to their clients. This strategy seems to be paying
off with Geometric entering into an arrangement with leading software companies.
During the fourth quarter, Geometric signed up with HP India Software Operations
to provide PLM services to HP and its global customers. Geometric has made
inroads in the US and plans to enter the Asian market soon. The company
increased its engagement with IBM at Ford and a new project in the automotive
space with a Gold Partner of Dassault Systemes in Europe. The company plans to
enter the Nordic countries jointly with Technia, a partner of MatrixOne for
eMatrix and CATIA related services. Geometric is also providing services to
Cenit, one of IBM’s largest partner’s in Germany and to Boeing through its
arrangement with Indian software major Wipro.

Geometric’s product revenues have been on the decline during the year and
the company expects this to continue for the next couple of quarters. The
decline in the global PLM market due to reduced spending in the manufacturing
sector also impacted the company. However, Geometric plans to focus on the PLM
market and become an affordable solution provider through it partners.

The company plans to focus on the services segment and has also plans to
provide engineering services through its GBU and concentrate on Aero and Auto
sectors. This would allow the company to provide end-to-end solutions in the PLM
area. Geometric increased its relationship with Powerway and is also involved in
integration activity at Powerway’s end-customer sites. Revenues from CEBU have
grown impressively over the last few quarters although it forms just 10% of
total revenues.

The company also plans to set up two dedicated offshore centers for
industrial customers and increase their share in total revenues to more than
20%.

Geometric’s fourth quarter performance was impressive at the operating
level although the company witnessed a sequential drop in the net profit. Going
ahead, the company expects products revenues to fall and this would have an
impact on the topline of the company. However, the company has improved its
operating margins due to better utilization and success of its partnership with
its software vendors in the service segment. We expect better operating margins
to have a positive impact on the bottomline in the long run although the
immediate quarters may see a flat sequential growth. Geometric’s strength it
is strategic alliances with software vendors and the recent client wins would
enable it to increase industrial clients and enter new geographies. We expect
Geometric to close fiscal 2004 with consolidated revenues of Rs 100 crore and
net profit of Rs 20.98 crore and further improve the performance in fiscal 2005.

Geometric currently trades at Rs 386 discounting our estimated March 2003 EPS
by 10 times and March 2004 EPS by 8 times. Geometric’s share price has
rebounded from a low of Rs 350 after the recent selling pressure on the IT
stocks. Post announcement of results, Geometric’s share price has stabilized
and currently hovers in the range of Rs 380 to Rs 400.

While Geometric Software operates in a niche area, which is significantly
smaller than, generalized software services, its continued revenue and margin
growth auger well for the future. We believe that its strategy of tie-ups will
continue to drive improvements in margins as a result of lowered marketing
costs. HOLD.

Sushanto Mitra 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