The Hindu Business Line : `Doing business in US has ASP angle to it'

SOME time ago, i-flex Solutions created the concept of Tank Size. Meant to give investors a clear idea of what revenues to expect in future quarters, the terminology, the company says, is gaining acceptance.

Mr Deepak Ghaisas, CEO, i-flex, spoke to Business Line a few days before its latest quarter results announcements and explained why Tank size was important.

Mr Ghaisas says that the US GAAP assumes that the vendor has hiked up licence fees if he gives a discount on maintenance fees. He says that this is not fair since the maintenance fees cannot be the same percentage between two orders of different licence fee sizes.

Typically, annual maintenance contracts come at 20 per cent of the licence fees. But if, for an order worth $5 million in licence fees, a vendor gets only 14 per cent for maintenance, US GAAP requires him to defer a portion of licence fee revenue (6 per cent of $ 5 million) over five years, he says.

Hence, the need for tank size which will include these revenues that the topline figure will not include.)

Mr Ghaisas dwelt on the company's quick contracts in Europe, and why the same can't be easily replicated in the US. Excerpts from the interview:

The US GAAP confusion causing a slump in revenues (necessitating tank size) will occur only when revenues from maintenance kick in - which may not be a few quarters after licence fee revenues have come in. So, in the beginning you talk only about licence fees. Do they get recognised as revenue? If not (and if part goes into tank size), could you explain why?

The vendor specific objective evidence (VSOE) concept on maintenance kicks in from licence fee revenue recognition when you account as per SOP 97-2. You start deferring revenues of licence fee first and accrue through the maintenance period. So, licence fee billed and monies received may not get recognised as revenue but will remain in tank.

In the recently ended year in March 2003, your tank size has gone up. What is the significance?

It went up from $36 million to $42 million. It means that more contracts have been signed, more licence fees committed, more revenues. That is, more revenues would get accrued over a period of time. But if you ask me over how many quarters - that really depends on the kind of contracts. If contract size is bigger, then realisation is longer.

Are only a few large clients contributing to orders or are there a number of small clients too?

It's a combination. It's a numbers game. We need to get revenues from smaller banks. For the value part of it, we need to get into bigger deals. We do not discuss average deal sizes on a quarterly basis. People then tend to look at licence fees divided by number of customers, which is not correct. Clients might have gone up but revenues might not have accrued. So, it is skewed. We do discuss annual figures. Even though that too has the same problem, some equalisation is there because of the longer time frame.

What is the latest trend?

From $1-m deals we are looking at $5-m deals. The Chile deal is $10-m plus.

Is the $6-million incremental tank size because of new customers?

Yes. It's because of new customers. This shows velocity in terms of quality and quantity. We are moving definitely from tier III (size of bank) to tier II - both in terms of corporate and retail banking. Retail banking gives you more value.

Is this an indication of reshaping of the banking industry in terms of being more open to technology spending?

There is a huge replacement market now. People had spent money in `80s and `90s. Now they are ready for replacement. Only 15 per cent of IT spending was done on packaged solutions. No bank, which had home grown systems in the `80s and `90s, is now developing new systems internally. Citibank never had a packaged solution for 100 years. Now they do. So, 85 per cent of the homegrown solutions market is coming to packaged solutions. While the 15 per cent pie itself is growing, the 85 per cent pie is getting added to that.Have the nature of orders changed?

The replacement market is coming up. No major new banks have come up but a lot of consolidation is happening.

Is there an issue in the US you needed to tackle?

No issues. But, banking in the US is different. We aren't looking only at the big banks that have a few branches in the country with millions of customers. The 11,000 community banks and 8,000 credit unions, like co-operative banks here are a great market for us.

But the US banks work on the application service provider (ASP) model. (ASPs invest in the infrastructure and banks use that and pay on per-transaction basis). So, we have to sell to the ASP as well as to the banks. This is happening. We have also formed an incubator in our company called Flexcell with HDFC Bank to replicate the ASP model in India. So many small banks are there in India - so why not give them a similar model?

Have you established tie-ups with ASPs in the US? Do you work together with them on a revenue sharing basis? What steps have you taken to address this dual challenge?

We have not established tie-ups yet. But if and when we sell Flexcube to community banks in the US, that's the way we will have to approach it.

How have your sales and marketing expenses changed with your US foray?

ASPs in the US is a huge market for us. Systems are old there and we need to push our systems. So far, in the last five/six years, we were spending 8-10 per cent of revenues in sales and marketing. Now, as you move into the US and Europe markets, you have to spend more. Penetration time and costs are both higher. Going from India, selling to mission critical projects are challenges. So, we have to create brand awareness. We need onsite presence to immediately tackle problems.

Have your recent orders in West Asia and in Latin America come in from big banks or from small ones?

In retail, you need the local touch. Our clients in Chile and in Egypt (where three banks control 40 per cent of banking) are all big banks. The first customer is important, and then the others will follow.