September 3, 2006

We have a different long-term perspective compared to other banking software companies in India... We are moving away from a lower level to a high quality, highly successful, mature product, where you get higher licence revenues... And orders of the GMAC kind will present a huge opportunity... — MR VISHNU DUSAD, MANAGING DIRECTOR; NUCLEUS SOFTWARE

Rarely do you get a CEO to give time to you twice before an interview appears in print. But that's precisely what Mr Vishnu Dusad, Managing Director; Nucleus Software, did, along with Mr Niraj Vedwa, Head, Global Sales and Marketing.

And, to top it, these meetings happened in New Delhi and Chennai. Mr Dusad talked about how he would ideally like Nucleus to be a 100 per cent product-centric company, from under 40 per cent now, and also evolve new pricing models for sustaining its future growth.

Excerpts from the interviews:

Given your target of reaching 50:50 between products and services, where would the hybrid services and products model stand, if services growth remains sluggish? What are you trying to achieve through services?

Ideally, we would like to be a 100 per cent product company. We are aspiring for that. We have a different long-term perspective compared to other banking software companies inIndia. Despite the fact that it could lead to lumpiness in revenues, if one goes by the revenue portfolio of any pure banking products company... That won't happen. Here's why: The fact is that we have already initiated movement towards annuity-based revenue streams. Apart from AMC (annual maintenance contracts) business, we are now talking about portfolio or transaction based pricing. It's a different pricing model from our earlier licence model.

Among your top five clients, how many have moved into this model?

It would be difficult for existing customers to move in that direction. They have created their business around this (licence) model. It would be too much effort changing existing customers. For the new customers, we are communicating the benefits to them. It is in our interest to more aggressively look for what their business would need and then incorporate it into the products. This compares against our earlier practice of their having to come up with requests for customisation. We are telling them that they don't need to spend millions of dollars on customisation. We would recover all that as your business grows. For them also it's meaningful.

An example of how you do this...

At the stage when we submit the proposal, we say that we have three business models: The conventional one where you pay licence fees now based on number of users compared to a lumpsum earlier, followed by the implementation and then the AMC. Two, based on so many 1,000 contracts, your initial pricing is low. When the contracts start growing, you pay us more and more, per 10,000 etc. In loan origination, for instance, it would be based on number of loans processed. In the third model, this is the size of your portfolio irrespective of number of loans, give us 10 or X basis points of your portfolio size. If it were $1 billion, then we would demand 10 basis points.

You have sold 38 different modules of your product. Is each one structured depending on client needs?

Yes, we are slowly moving towards what is best for us.

This would largely be for the 24 new clients. Or, what proportion of new clients would be open to this?

As of now three or four.

Will your revenues not rise and fall with the revenues of your client?

True, but look at it this way. At least for the next 5 to 10 years, I don't think we would grow to the size that would affect us in terms of what is happening to the client. We are looking at a $10-trillion lending industry. Today, the costs that they incur on technology budgets are huge. In turn, what we offer as value proposition is stronger in terms of costs they incur today. Let's look at proportions. For instance, today, the portfolio size is Rs 1 lakh, and, they incur a cost of Rs 1,000 whereas with our pricing, we can bring the cost down to Rs 100. For them, it is a huge saving of Rs 900 so they are not looking to touch this Rs 100 — they understand.

That's how substantial our value addition to their business is, unlike services, where they have to pay based on time and material. Here there isn't any such charge. For us, we can see a much longer revenue stream coming this way. It is a 10-to- 20-year-long relationship. A customer we have in Indonesia has been with us for 14 years. If we had tied up in this manner back then, the revenue stream we would have had in 14 years would have been at a different level. They have upgraded our solution three times over.

What is the rationale for the wide geographic base that you are attempting to build, especially in relatively lower-margin regions in South Asia or India?

As a company, we cannot afford to stay in the geography where we are. Otherwise as a business, we are not doing justice to what we want to do. From Day One, we have said that we want to make it a global product. That being the case, our investments, and our product designs have all been for a global roll out. That is the value proposition we offer to GMAC (General Motors Acceptance Corporation), ICICI Bank, etc... Banks that want to build global businesses using our product. So there's no reason for us to limit ourselves to these geographies. We have more than one implementation in India, Indonesia, the Philippines, Japan, the UAE and Mauritius. Look at it this way. Multiple implementations have taken place only in only six countries. When we do deep penetration in another 100 countries (in another 5-10 years easily), the potential is large.

But you are talking about retail banking segment, a relative niche...

Certainly, retail (lending) is going to be a prominent sector in all hundred countries over the next decade. It is not like derivatives or that nature, where a poor country may or may not start using them in 10-20 years. Retail lending has to happen. It is already happening, including micro-finance. With a product like ours, it will happen more efficiently. Today, we have helped India, directly or otherwise, because of our design or needs of customer banks, we have helped bring down cost of retail lending substantially, by providing services to the likes of ICICI Bank, HDFC Bank, Citi Financial, and now Cholamandalam DBS. That itself makes the retail lending industry grow much faster. The number of players coming in is high and they are all aggressive.

Your orders on hand are worth Rs 141 crore. You said that about Rs 36 crore relates to GMAC's International Operations. We want to understand the nature of the GMAC relationship and about the global roll out plans.

There is a licence component and a guaranteed service component. We have broken down the licence part over four years into years and months. As the project is executed, we will recognise it in components.

So, out of the Rs 56 crore of the GMAC contract, Rs 36 crore is the unexecuted part...

Yes. Rs 36 crore from GMAC is the amount that we still have to recognise; Rs 20 crore has already been executed.

How does the rest of the relationship go for 39 countries? How will it start and get executed?

We have done this for India, Thailand and China. We will be starting in a couple of more countries this year. Every subsequent implementation in a country after building a base would take less time.

For incremental revenue, has the contract size been frozen up front? Or will there be a licence fee portion?

It is a perpetual licence and not user-based licence. The total amount accruing to us in this period is Rs 56 crore for the 39 countries.

This has helped you penetrate into Europe. How are planning your next phase of growth?

We are getting noticed in the captive auto-finance area that has the likes of Ford, Toyota and Volkswagen. We were knocking on their doors. Our name never quite registered with them before the GMAC deal. Have you done something in auto finance in Europe or US, was the question they posed to us. We were facing a lot of problems there, but not so in AsiaPacific, since it is tried and tested here.

After our GMAC relationship, two things happened. It's a closed circle, and they talk to each other and we became known. Also, GMAC published it in its own journal. An unknown company getting such an order was a big thing. And GMAC has also tried other solutions earlier. Some of the big names are talking to us very seriously and they look at us professionally, as a mature vendor who now has the capability to implement.

Are you at a point of inflection? What factors give you the confidence that you are at a take off point?

The GMAC order is a huge opportunity. In this kind of growth, lumpiness is one factor. It's not that you don't worry about lumpiness, but whatever lumpiness comes would be addressed, in a way, because of high growth. What's happening is that we are moving away from the low level position to a high quality, highly successful, mature product, where you get higher licence revenues. Today, contracts we get are higher priced, for the licence. In the Dubai market, for instance, we got a contract from a bank based on portfolio pricing. They have moved from the late 1930s in ranking in consumer banking to No. 4 — they are highly respected and they have chosen us. So, our visibility increases. Like this, we are addressing different markets.

But the biggest market for banking is the US. How do you plan to break into that market, after stepping up in Europe?

We are investing very heavily in identifying and fulfilling gaps that customers have in functionality. That required for the US market, we have 60-70 per cent in our product. Thirty per cent of the functionality we still have to add. We have tied up with a company in the US that is doing this gap Study between our product and what is typically required for the US market. They would submit a report, and based on that report, our team would make the product 100 per cent US compatible.

The US, they say, is a difficult market, with not just the bank making the IT decision but also the ASP (Application Service Provider) model in vogue...

We are investing in terms of time. We are looking at launching the product at some time middle of next year, but will soon start marketing, once gaps are identified; do pre-sales marketing through our partners such as Sun and IBM.

Who have you chosen to help identify those gaps?

Very respected name in this business and very specialised. The US is substantially different. So we feel that the gaps have to be identified. We must understand the terminology used. This consultant will evaluate our product. Third quarter of next year, we will hopefully launch the product. That's our strategy for the US. We are focused on auto finance and hope to get some breaks there in the US. In this part of the world, we are doing well.