Aricent has experienced impressive growth over the past few years by capitalising on the communications industry’s need to shorten time-to-market and maximise efficiency by outsourcing product and back-office software development.
A communications software company, Aricent was originally known as Hughes Software Systems in the 1990s. The company was acquired by Flextronics in 2004 and was hived off into a business unit called Flextronics Software Systems (FSS) following the acquisition of a number of software development, outsourcing, and operating support system firms.
In April 2006, Flextronics sold an 85 per cent stake in FSS to private equity firms Kohlberg Kravis Roberts and Sequoia Capital, retaining 15 per cent ownership.The deal closed in September 2006 with FSS being renamed Aricent. The acquisition valued Aricent at $900 million.
Three name changes notwithstanding, the company has a long history of leadership in the global communications software market with an extensive portfolio of over 125 software products and services. These products are used to manage wireline, wireless and IP networks.
Its offerings include general packet radio service and universal mobile telephone system protocol stacks, as well as voice over packet technology, pre-tested software components for telecom equipment products, and mediation systems for billing and service provisioning packages.The company also provides outsourcing services for product development, engineering and testing.
With more than 350 clients worldwide, including Airtel, Cisco Systems, Ericsson, Motorola, Nokia Siemens, Samsung, Sony Ericsson, Virgin Mobile and Vodafone, Aricent is a key player in the original equipment manufacturer (OEM) space. Its headquarters are in Palo Alto, California; it has over 7,500 employees, 15 offices worldwide and 14 R&D centres.
Currently, telecom infrastructure is driving Aricent’s growth and accounts for over 80 per cent of its $300 million revenue. The bulk of the company’s business comes from creating virtual R&D labs, staffed by Aricent employees that cater to the specific development needs of the customer.
For tier-1 customers such as Alcatel, Nortel or Nokia, these teams can be as large as 750 to 1,000 people, while for mid-sized players such as Tellabs, they would have up to 400 staff.
While most of Aricent’s business comes from vendors, the company has of late begun focusing on carriers. It works with them to develop back-office capabilities, often helping to integrate systems from partners such as Hewlett-Packard.
These now represent the fastest growing part of the firm’s business with service providers contributing $35-$40 million to the company’s revenues. The rest is from handset manufacturers.
As part of its strategy to double revenues from telecom service providers from the current 10-15 per cent to 25-30 per cent, Aricent has recently acquired DataLinx, an American communications software firm. “This acquisition has given us a strong presence in the US market as well as access to several tier-1 service providers. It was particularly important for our company given the fact that the US represents the fastest growing market for Aricent in terms of revenue,” says Sanjay Dhawan, executive vice-president and chief strategic officer, Aricent Technologies.
An ambitious company, it intends to exceed the industry’s growth rate of 33-35 per cent per annum and is targeting a $400 million topline this year. “We are a very aggressive company and are marching towards the $1 billion mark by the turn of the decade as the revenues accrued from our OEM business and our services and vendor business equalise,” says Dhawan.
With over 70 per cent of its employee strength based in the country and R&D centres located in Chennai, Bangalore and Gurgaon, the company has a strong presence in the Indian market. “We are now planning a fourth development centre in the country and are in the process of finalising a location,” says Dhawan.
However, despite a strong presence, it has a less than 20 per cent market share in the Indian market which accounts for about 5 per cent of its total revenues.
Given the importance of the Indian telecom market in the global arena, Aricent intends to increase its focus in the world’s fastest growing telecom market.As a step in this direction, the company is investing $100 million in the country over the next two years, besides increasing its employee strength by another 2,000 people.
However, the company is in head-tohead competition with other firms that are experiencing significant growth such as Wipro and Mahindra Tech.
Other major competitors include big systems integration firms such as Accenture, and regional players such as European software development and integration house TietoEnator.
Furthermore, with the tax holiday for the $30 billion IT/BPO industry ending two years before time, Aricent now has to pay a minimum alternative tax of 11.33 per cent on income for which deduction was claimed under this section. This will impact the company’s bottomline by 1.5-2 per cent.
While Europe accounts for a significant portion of Aricent’s revenues at over 50 per cent, in the future, the company is betting high on emerging markets and has directed its attention towards Eastern Europe, East Asia and China. In fact, China, Taiwan and Korea together contributed $6 million to Aricent’s revenues last year and the company expects the figure to reach $12 million next year.
