Indian software companies such as Wipro and Sasken Technologies will see revenues from telecom clients slow down in the wake of consolidation and poor results recently announced in the communications industry.
After completing a merger in November, equipment vendors Alcatel and Lucent have begun the process of restructuring their product lines and research and development operations. Finland’s Nokia and Siemens of Germany are also on track to merge their network equipment businesses by the end of this quarter.
Executives in the software industry say the total value of R&D outsourcing to the country by global telecom majors Alcatel-Lucent, Nokia-Siemens, Nortel, Motorola and Ericsson is approximately $4 billion (Rs17,680 crore).
About half of these projects for software development and system design are shipped to vendors such as Wipro, Sasken, Mindtree Consulting, Aricent (formerly Flextronics Software Systems), Infosys, Tata Consultancy Services and Tech Mahindra.
“We expect revenue growth from (telecom) accounts to remain flat for Wipro as it will not ramp up unless the product lines at telecom equipment manufacturers are rationalized,” Harmendra Gandhi, analyst with Mumbai-based Brics Securities said, referring to the products that may get dropped at the telecom vendors.
Alcatel-Lucent is among the top 10 customers of Bangalore-based Wipro. The company, which will resume its talks with new product groups at Alcatel-Lucent this quarter, garnered around 22% of its revenue from the telecom segment by serving customers such as Alcatel, Lucent and Nokia.
Recent results of companies such as Motorola, the second-ranked maker of handsets, is also a cause for concern, others said. Julio C. Quinteros, vice-president of global investment research at the New York office of investment bank Goldman Sachs, told Mint: “We expect some of the pure project-based revenues from Motorola to be cut off as it missed some of its product cycles and may hold back on new launches.”
Schaumburg, Illinois-based Motorola’s net earnings for the quarter to December 2006 dropped to $624 million from $1.20 billion recorded in the same quarter of 2005.
Uncertainty over new and existing business from telecom clients affected Wipro’s product engineering service business too. “Product engineering business at Wipro grew by 3.9% in the third quarter, down from 9.1% in the same quarter during 2005 because of this consolidation,” Brics’ Gandhi explained.
A Wipro executive admitted to a slowdown in an interview. “We are seeing some challenges in terms of getting new projects from telecom equipment vendors like Alcatel-Lucent and expect muted growth in these accounts,” Ramesh Emani, president of Wipro’s product engineering business said.
Bangalore’s Sasken also indicated that the merging telecom vendors are holding back some projects while they decide on whether to continue with some of the existing products. “They (the vendors) are prioritizing as to what products to continue and what they should discontinue,” Srikanth Kannankote, chief operating officer and president of Sasken said in a call with analysts on 25 January.
Another Sasken official, who did not wish to be identified, said telecom consolidation has indeed resulted in sluggish growth in revenue from the telecom segment for the company. Sasken derives almost half of its revenue from equipment manufacturers such as Alcatel-Lucent and Nokia-Siemens.