Geodesic Information System: Buy

Niche play on instant messaging

Strong growth record

Scalability, a concern

Low valuations despite high margins and a strong presence in the promising instant messaging business make the stock attractive.

The company derives most of its revenues from developing instant messaging services.

Investments with a 12-18 month horizon can be considered in the stock of Geodesic Information Systems, considering its niche business, moderate valuation and good growth prospects. At Rs 181, the stock trades at 11 times its FY-08 earnings and nine times its estimated current year earnings.

With a net profit margin of 49 per cent, much higher compared to other listed, products-focussed technology companies, the valuation appears attractive, especially considering the good growth prospects.

The company has managed a compounded annual revenue growth of 67 per cent and profit growth of 68 per cent over the past three years.

Niche player

Geodesic operates in a niche area in technology. The company derives most of its revenues from developing instant messaging platforms/services and licensing them mainly to enterprises under the 'Mundu' brand. Instant messaging is a rapidly expanding mode of real-time communication across the world. A Radicati Group report of August 2007 puts the market size of IM to be $530 million by 2011.

Geodesic's product (Mundu ICE stack) caters to clients ranging from portals and publishers to telecom operators, mobile handset manufacturers, system integrators and even end-consumers. Geodesic also licenses its instant messaging platform to mobile handset manufacturers and telecom operators, thus providing it with sustainable revenue streams, with scope for expanding margins.

The product's capability of allowing seamless chat services across Google Talk, Yahoo! and MSN has been a major selling point to drive sales.

Hybrid revenue model

For its enterprise and portals and publishing clients, Geodesic charges a licence fee, a customisation fee, annuity based service charges and charges for upgrades and updates.

For retail customers, it charges a fee based on subscription.

This model clearly provides a sustainable revenue stream.

The significant proportion of licence revenue means that it is also able to de-link revenue growth from headcount growth, by optimising costs.

Client profile provides sustainable business: A recently won deal from Nordisk Mobiltelefon, a European telecom and ISP operator, for providing messaging and Internet radio on the mobile phone, is a typical example of its engagements. Geodesic has won a similar deal from Idea Cellular in India. This allows leeway for clear revenue-sharing arrangements, as downloads or logins to access internet radio on the mobile would be clearly measurable.

The company has also launched its messaging services in Nokia and Sony Ericsson smartphone handsets and has an agreement with players like BenQ. Mio Digi-walker, a key player in the mobile GPS navigation space is another client. The roster also includes portals such as Naukri and, players which constantly upgrade their Web sites and offer more cutting edge-services, providing a sustainable business proposition for Geodesic.

As handset manufacturers increase their smartphone presence in rapidly growing markets such as India and the rest of Asia, Geodesic stands to gain from their expansion.

The company has launched an instant messaging platform for the hugely successful iPhone and may be well-placed to capture a share as and when Apple allows third-party software platforms on its phones. iPhone's impending Indian foray later this year also represents an opportunity.

Other key developments: This apart, the company has also developed voice over internet protocol (VoIP) products to work with Windows mobile and Symbian-based phones and desktops, for PC-to-PC calls. VoIP is also an ever expanding market providing for cheap communications.

The launch of Amida Simputer, a wireless data processing and communication device, is under trial runs with about three million customers for the government's proposed multi-purpose national ID card project.

The company has also forayed into publishing by acquiring the Chandamama brand. The subscriptions have increased 60 per cent in the past quarter after the acquisition.

With its Telugu version already launched and Hindi and Tamil versions on the anvil, this may help capture regional audience as well. An increased subscription may lead to more keenness on the part of advertisers, leading to increased ad revenues.

The risks to this business are scalability challenges in executing any multi-million dollar deals, technological obsolescence and competition from platforms such as IBM's Lotus Sametime.

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