Information Services Network Limited for 2002-2006

Information Services Network Limited for 2002-2006

Executive Summary

The report entitled Information Technology Industry of Bangladesh: Analysis of the Financial Performance of “Information Services Network Limited for 2002-2006” mainly concentrates on the analysis of the annual reports of Information Services Network Limited from several different perspectives. The report includes a brief analysis of the state of the industry derived from comparison with the financial ratios of four other companies.The report consists of the vertical, horizontal and trend analysis of the Profit and Loss accounts as well as the Balance Sheet of Information Services Network Limited for the periods 2002-2006.

The horizontal analysis of the Profit and Loss accounts show increase in net revenue, operating profit and net profit after tax for the period 2002-04 and 2005-06. However, the company made an operating loss in 2005 and was able to make only a small profit from other revenue sources. This was the smallest profit ever made and as a result they could not declare any dividend in that year. But they recovered well and in 2006 were able to declare a “good” dividend and retain some of the profits for future use. The vertical analysis shows a similar pattern because net profit as a percentage of net revenue increased in the period 2002-04 and 2005-06. The company in these years had a profit margin of around 20%, which is quite healthy. It further shows that other revenue was almost 20% of total revenue and was becoming an important source for the company. The trend analysis reveals that had a positive trend from 2002-2004 and after a difficult year in 2005, had recovered to almost their former state in 2006. The highest dividend was paid in 2006.

The horizontal analysis of the Balance Sheet shows increases in both current and non-current assets and stockholders’ equity earlier, but falls in the year 2005. In 2006 all values increased from the previous year. The company shows a good liquidity as the amount of current assets is several times larger than the amount of current liabilities in all of the years analyzed. This is further seen from the vertical analysis. Stockholders’ equity as a percentage of net assets was in the range of 81%-84% in all years except 2005. The analysis further shows that the company is facing a problem of growing accounts receivables. The management should look into this problem and solve it before these turn into bad debts. The trend analysis shows that total assets fell in the first four years but rose again in 2006. Total stockholders’ equity rose throughout the five years analyzed.

The ratio and industry analysis of Information Services Network Limited reveals that the financial performance is quite good compared to its competitors; however there is room for improvement if Information Services Network Limited is to become the market leader. Information Services Network Limited has a good liquidity; however the quality of accounts receivables is not as good as other companies. The company’s long term solvency ratios are also better than the industry average, which will definitely encourage future investment. The profitability ratios are where the company lacks behind the market. The low profits in 205 caused a loss in investor confidence and led to a fall in share prices. The company does have a good EPS in all years except 2005, in comparison to other companies the industry average. The market tests show that Information Services Network Limited had reached the industry average in almost all tests in 2006, indicating that they were competing for a position as the dominant player. This trend certainly shows that Information Services Network Limited is doing well and that it will attract new and old investors in years to come.

Information Services Network Limited is one of the largest IT companies in Bangladesh. It was able to recover from a difficult position to become a strong competitor. However, if it wants to become the market leader, it would have to improve in certain aspects, including efficiency. The new management has been successful in cutting costs. They have a plan and are well organized. If they continue to be successful then, Information Services Network Limited has very high prospects.

Objectives:

The objective of the report was to relate the accounting theories learn in class to the context of a real world scenario to understand their practical implications. The purpose of the report was to study the financial reports of companies in the information technology industry and develop a valuable insight of the corporate accounting system and its practices. The main requirement was to obtain financial information of a company and then analyze and interpret the information to identify the strengths and weaknesses of the companies individually and with the industry.

Scope:

This report is based on the financial performance of Information Services Network (ISN) Limited for the years 2002-2006 through comparative income statements, comparative balance sheets and ratio analysis and compared to five other companies’ financial statements briefly.

This report shows the vertical, horizontal and trend analysis of the company’s Profit & Loss Account and Balance Sheet for Five years. It also includes an analysis of four types of ratios – liquidity ratio, equity or long-term solvency ratio, profitability tests and market tests. Finally there is a comparison of this company’s ratio with the industry average. The areas of concern for management, creditors and investors have been identified in the report.

Methodology:

The information required to prepare the report was obtained from the Annual Reports of Information Services Network (ISN) Limited which were available from the Dhaka Stock Exchange and from websites. The textbook “Accounting Principles” by Hermanson was used for reference and as a source for the different formulae used and analyzing the financial statements. Comparative Balance Sheet, Income Statement and Cash flow Statement of the company were prepared and used as the source of secondary data.

Limitations:

In accomplishing this report, various limitations were faced, many of which were due to the nature of the “service” industry.

§ Some conventional financial ratios, e.g. those including inventory, had to be excluded because of the nature of the industry. Net revenue had to be used instead of net sales for certain ratios.

§ Also the absence of preferred stock, ratios like times preferred dividends earned ratio had to be excluded.

§ Finally, the five companies that have been chosen may not represent the whole picture of the IT industry of Bangladesh, although it has been assumed to do so. To get a true image of the industry other non-listed companies have to taken into account.

Overview of Information Technology Industry of Bangladesh

The Information Technology (IT) sector in Bangladesh has developed in to a form, in this last decade. Ever since Bangladesh was connected to the internet in 1996, this industry has been developing. But the real growth came in 2006 when Bangladesh was connected to the SEA-ME-WE-4 submarine cable. Connectivity speed increased and costs fell to some extent. It was during this time many companies began taking a real interest to develop and compete against each other in this sector. Currently the players in this industry are providing a range of services including, Software development, Web development, Networking solutions, Satellite Communication, Hardware and accessories sale and more. Recently a lot of companies are trying to setup Wi-Fi technology to make internet speeds fasterand more accessible. Some companies are exporting software to countries like Germany, Spain and United States. Although the industry is still in its infant state, a lot of companies have invested in trying to develop the IT sector in Bangladesh and are competing with countries like India and Sri Lanka for international markets. India exports $12.5 billion worth of software every year, with a growth of almost 30%! Unfortunately Bangladesh cannot export even 1% of the amount India does.

The major problem in this industry is the lack of proper infrastructure. Bangladesh has to rely on a slow internet connection. Although now connected to a submarine cable, the costs of bandwidth are very high. It costs a local software firm Tk 62,500 a month for 512 kbps (kilobits per second) dedicated internet connection to Bangladesh Telegraph and Telephone Board (BTTB). But in India, firms pay the amount that is hardly Tk.4,500 for the same connection. High taxes on internet usage have also caused a hindrance in the development of the IT sector. The devaluation of the taka against the dollar every year does not improve the situation as bandwidth has to be brought in terms of dollars. Bangladesh also lacks a skilled labor force. Most computer and networking graduates leave the country in the hope of earning more in foreign countries. Most companies are not able to pay enough salary to these skilled people. Other problems include constant disruption of electricity and not enough support from the government. Bangladesh was supposed to be connected to a new submarine cable in early 2007. But not enough was done by the government to achieve this.

Though all these problems exist, some companies have invested a lot of money and effort to setup this potential industry in Bangladesh. They believe that if they can show that this industry can bring a lot of foreign currency and help to develop the country, more people will invest and the industry can truly become a large source of employment and money. At the initial stage the private stakeholders are working with the government to setup a “silicon valley” in Bangladesh. Plans are also being made to setup a chip manufacturing factory in Bangladesh. This will greatly help in making networking cheaper and reduce the costs of hardware. A Danish IT expert who had visited Softexpo 2005 in Dhaka said: ‘Bangladesh is a sleeping giant as far as the software outsourcing is concerned.’ This shows how much Bangladesh can earn from developing this industry.

The major stakeholders in the market are, Bangladesh Online, Agni Systems, BRAC Net, Information Services Network, and BDCOM. This report looks into the financial information of some of these companies. The first company to invest into IT was Information Services Network limited, who in 1996 started providing internet facilities to private consumers.

Overview of Information Services Network (ISN) Limited

Information Services Network (ISN) Limited began its journey in 1995 as a pioneer in providing internet facilities to a growing demand. Bangladesh joined the net on June 6, 1996 through ISN Limited with the first ever 64 kbps VSAT transmitting and receiving data via a Hong Kong Gateway. This was the first private company to provide internet services in Bangladesh. Since then ISN limited has tried to provide the fastest, the most efficient and technologically sound service for its valued clients who are growing in numbers day by day.

In the year 1997 and 1998, the company consolidated its operations in all areas especially in Internet and turned its system to achieve high professional standard. The year 1999 exhibited a significant advancement for its joint venture agreement with a foreign partner. In 2001, ISN invested funds to expand its services at Khulna by setting a branch ISP using own VSAT based satellite link, which has eventually provided a unique position for the company to render additional Internet Service coverage to the South Western population of the country. A new voice activated only phone based internet access service was introduced by the company in 2002. In 2003 it acquired its office and operation space, something which very few ISPs have been able to do.

As with all businesses there have been some setbacks. In 2005 the company ended the year with the lowest ever profit. Although evasive measures were taken by the company, only partial success was possible. A number of problems including, the leaving of a senior member of the team in charge of software development, the devaluation of the taka with the dollar which meant higher bandwidth costs and the rising costs of energy along with power failures caused low profits and the company as a result was not able to pay any dividend that year. Another reason for not declaring dividend was that, the company wanted to create a fund to update its operations by installing fiber optic cables and become connected to the SEA-ME-WE-4 submarine cable. The company was able to come out of this setback and has not had to look back since then.

The company has so far been successful to put together a star team of IT Specialists, Engineers, Customer Support and Marketing team who are serving this pioneer company round the clock to grow as one of the largest and most versatile IT company in the country. The company has also invested in a joint venture with a Sri Lankan company to form Golden Key – ISN Limited, a company also working to provide quality internet services. ISN limited owns 51% of the share of this company. ISN limited also publishes a monthly IT related magazine called “PC World Bangladesh”. It is published under the license of International Data Group (IDG) USA. PC World Bangladesh contains mostly the same articles as the Award-winning US version and regional IT news and events. It was first published in June 1996.

ISN limited became a Public Limited company and its shares have been traded in Stock Exchange since 19th May, 2002. Currently 39% of the company is owned by Directors and Sponsors, 11% by the company and 50% by the public. The company has an authorized share capital of Tk. 100 million and has issued shares worth 71.1805 million. Its main sources of revenue come from providing bandwidth for both private and commercial use, web hosting and development and providing domain, software development and sales form PC World Bangladesh.

In the future the company has planned to setup offices and a fully equipped installation in Chittagong. It would like to expand its services in Comilla and Sylhet. As soon as Voice over internet protocol (VoIP) is available to the private sector the company wishes to start its services. It is also working on Wi-MAX deployment and intends to provide the service as soon as a true industry standard version of it is available. In the software development sector they are in close contact with a German company. They are very optimistic to receive orders from them very soon.

Opening a computer hardware based business wing is also under active consideration of the board.

7. Industry Analysis

This section looks into the ratios of the five companies taken in this report and forms an industry average. The ratios of ISN limited have been compared to the industrial average ratios and an analysis has been made, of how well ISN limited is doing in comparison with the other companies.

Current Ratio:

The current ratio has risen in the past five years. Different companies in this industry had different current ratio, but the trend was improving for all. ISN Limited had an almost equal ratio with the average, ranging from 1.05 to 1.12, till 2004. From 2006 industry average rose above.

Quick Ratio:

Quick Ratio also has risen in the past five years reaching 4.8 in 2006. Intech Online has the highest quick ratio, while Daffodil Computers has the lowest. Information Services Network Limited has maintained a ratio higher than the industry average till 2005. In 2006 it fell below the market average, indicating that it had not kept up with the other stake holders in the market.

Accounts Receivables Turnover:

The Accounts Receivable Turnover ratio increased till 2004, then fell considerably in 2006. Agni Systems Limited maintained the highest ratio, indicating that they were able to collect most of their accounts receivables throughout the year. Information Services Network Limited had the highest ratio in 2003 of 2.93, which fell to 1.5 by 2006. This means the accounts receivables were collected or turned over only about 1.5 times on an average.

Average Collection Period for Accounts Receivable:

The industry average has increased in recent years showing that the average collection of debtors takes a longer time. This shows that the quality of the accounts receivable has fallen, because of the increase in collection period. Agni Systems were still able to maintain a good collection period at an average of 45 days in the last 5 years. Intech Online has the highest collection period of over 1 year! Information Services Network Limited has an increasing ratio quite above the industry average.

Total Assets Turnover:

The ratio for Total Assets Turnover has remained almost constant for the industry. The larger the ratio, the larger is the income on each taka invested. Daffodil Computers were able to get the highest returns from their assets invested. Information Services Network Limited had a ratio almost close to the industry average.

Equity Ratio:

The equity ratio in the information technology industry has remained somewhat steady ranging from 0.76-0.86. However it shows an increasing trend. The ratios for all the company were basically stable. Information Services Network Limited has kept pace above the industry average. This signifies that the shareholders would be interested to invest more in the company. Agni Systems and Intech Online managed to keep the highest ratio.

Stockholders’ equity To Debt Ratio:

The industry average for Equity to debt ratio has steadily increased till 2004. Then in 2005 it doubled. The industry shows high average, which signifies that the stockholder’s equity is almost 10 times the amount of total debt. Daffodil Computers were not able to show a high ratio, which could lead to a fall in share prices. Information Services Network Limited had a ratio close to the industry average till 2004 afterward they were not able to keep consistency with the industry.

Rate of Return on Operating Assets:

The rate of return on operating assets is falling steadily. Although it remained steady from 2003-05 it fell in 2006. In the five years, both Bangladesh Online and Intech Online were most efficient. Intech Online was the more stable one among the two. Information Services Network Limited was far below the industry average and also had a negative value for 2005, where all companies had high positive values.

Net Income to Net Sales:

The industry averages have increased a lot especially in 2004, and then it fell again. Bangladesh Online Limited achieved a high level of profitability and has values well above the industry average. The overall performance of Agni Systems and Intech online remains consistent with a fall in profitability in 2006 and their position is quite good relative to the industry average. Daffodil Computers performed below the average. Information Services Network Limited had stable values except in 2005, but all its values were well below the industry average.

Return on Equity:

The industry average has fluctuated a lot in these five years. The return of equity of the companies also fluctuated. Daffodil and Information Services Network Limited were the ones most stable. Information Services Network Limited’s return of equity was below the industry average, but was just able to rise above in 2006. In 2006 the return on equity was 12.68% showing that the stockholders get a return of 0.12 taka on each taka capital invested. International Services Network Limited has a similar amount of return of 0.12 Taka in 2006.

Earnings per Share:

The Industry average was the highest in 2002, probably because of the irregular amounts of EPS by Daffodil computers. This however stabilizes in the following year. In the last three years there is a downward trend. International Services Network Limited, however, had a high EPS during these years. This shows that although EPS for all the companies fell, International Services Network Limited still had a high EPS. This would definitely improve their position against other companies.

Earnings Yield on Common Stock:

The earnings yield for the industry has showed positive trends except in 2004. The earnings yield for Bangladesh Online and Intech Online fluctuated throughout the period as did that of most of the companies. International Services Network Limited had two peaks, in 2003 and in 2006. But most of the time it was below the industry average.

Price-Earnings Ratio:

Price Earning Ratio of this industry is rising in also fluctuated showing an unstable sign for the industry. The ratios for all companies rose and fell. Through this period Bangladesh Online were the most stable, even though they had ratio of 14.6 in 2004 and 7.1 in 2005, indicating that the price per taka earned had halved within a year. International Services Network Limited had a ratio above the industry average, going as high as 50.76 due to the fall in EPS in 2005. But in 2006 this fell to 9.11, probably because investors were uncertain after no dividend was declared in 2005.

Dividend Yield on Common Stock:

The dividend yield in the IT industry varied a lot. The reason for this was in inconsistency of the companies of paying dividends. International Services Network Limited, Bangladesh Online Limited and Intech online were the companies that paid dividends in four of the five years. International Services Network Limited was the only company that paid cash dividends in 2006. They also had the highest yield, which would attract investors from other companies.

Payout Ratio on Common Stock:

The industry average indicates that companies typically pay half of their earnings as dividends. Companies like Agni Systems and International Services Network Limited have paid good amounts of dividends in comparison to earnings. They have also retained smaller amounts. Most of the companies are trying to pay a larger amount of their earnings as dividends, to encourage investors. Bangladesh Online on the other hand, seems to be paying smaller amounts as dividends, indicating that they want to retain most of the profits, probably for some new investment purposes.

3. Horizontal Analysis of Comparative Financial Statements of ISN Limited

Horizontal analysis helps detect changes in a company’s performance and highlight trend over several accounting years. It makes use of comparative financial statements, as shown below. Comparative financial statements present the same company’s financial statements for two or more successive periods in side-by-side columns. Calculation of absolute currency changes and percentages are then done, and the trend compared by horizontal analysis.

Below are the Profit & Loss Account and Balance sheet of ISN Limited for the years 2002-2003

Information Services Network (ISN) Limited

Profit and Loss Account

For the year ended, 31^st December

Information Services Network (ISN) Limited

Balance Sheet

As at 31^st December