Sify Technologies Limited (SIFY) Q2 2006 Earnings Report, Transcript and Summary

Good evening ladies and gentlemen, and welcome to the Sify Limited Earnings Results for Q2 ended September 2006 Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host, Ms. Truc Nguyen, Investor Relations for Sify Limited. Thank you Ms. Nguyen, you may begin.

Thank you Dan. I would like to extend a warm welcome to all of our participants today on behalf of Sify Limited. I am joined on the call by Mr. Raju Vegesna, Chairman and CEO of Sify Limited; Suri Venkat, Chief Operating Officer and Durgesh Mehta, Chief Financial Officer of Sify Limited. Following our comments on the results, there will be an opportunity for questions. If you do not have a copy of our press release, please call the Global Consulting Group at 646-284-9407 and we will have one sent to you. Alternatively, you may obtain a copy of the release at the Investor Information section on the Company’s corporate website at www.sifycorp.com. A replay of today’s call may be accessed by dialing in on the numbers provided in the press release, or by accessing the web cast in the Investor Information section of the Sify website. Some of the financial measures referred to during the call and in the earnings release may include non-GAAP measures. A presentation of the most directly comparable financial measures calculated and presented in accordance with GAAP and a reconciliation of such non-GAAP measures of the differences between such non-GAAP measures and the most comparable financial measures calculated and presented in accordance with GAAP are also available on Sify’s website. Before we continue I would like to point out that certain statements contained in the earnings release and on this call are forward-looking statements rather than historical facts that are subject to risk and uncertainties that would cause actual results to differ materially from those described. With respect to such forward-looking statements the company seeks protection afforded by the Private Securities Litigation Reform Act of 1995. These risks include a variety of factors, including competitive developments and risk factors listed from time to time in the company’s SEC reports and public releases. Those risks are intended to identify certain principle factors that could cause actual results to different materially from those described in the forward-looking statements, but are not intended to represent a complete list of all risks and uncertainties inherent to the company’s business. I would now like to introduce Mr. Raju Vegesna, Chairman of Sify. Raju?

Thank you Truc. I would like to welcome everyone on the call once again and thank you for joining us. At this outset, I would like to introduce our Chief Operating Officer, Mr. CVS Suri to all of you. Suri is a graduate from Delhi University and has a Masters in Management from XLRI Jamshedpur, one of the India’s leading business schools. After a successful career in large organizations such as ITC Ltd., he also built an infrastructure company as an entrepreneur, so he brings to Sify years of his experience in chain management, business development and human resource assistance. He will oversee operation with a focus on people, processes and synergies between Sify’s multiple businesses to unlock great value for our customers with an integrated approach. Sify is in the service business and we understand to the importance of developing our human resources to maintain our industry leading quality of service levels. I’m confident that Suri will play a key role in helping growth capabilities and caliber of the Sify team, an essential prerequisite to the growth of our business in India and overseas. I would also like to share with you the good news that we have won recognition from Frost & Sullivan from the third year running from the market leadership in IP VPN services. We have just come from the award ceremony where we received the market leadership award for 2005 and 2006 IP VPN services in India. I will now comment with opening remarks on our performance in the last quarter. I’m pleased to report that our profit for the quarter was $1.49 million with revenues of $30.1 million, about 18% higher than the revenues for the same last year. We are able to gain momentum for the year by growing our revenues for Q1 over the previous quarter for the first time. We also conducted a business analysis and a restructuring during the past two quarters for this year, and are now beginning to see the results of this effort in the form of improved margin and better cross management. We intend to continue this effort in the coming quarters. However, I believe the full benefit of these changes will be more evident six to nine months from now as we move closer to realizing our vision of ensuring smart growth with the profitability through leveraging of the many synergies across our businesses. I will now request Durgesh to take you to our financial performance throughout the last quarter.

Thank you Raju, hello everyone, I will now go through into details of our financial performance during the quarter ended 30th September 2006. Our revenues were $30.10 million for the quarter, 17.9% higher than in the quarter ended 30th September 2005. The sequential growth in revenues over the previous quarter was 4.9%. Our cash profit in adjusted EBITDA terms grew three fold from $1.18 million in the same quarter last year to $3.55 million in the current quarter. Our net profit as Raju shared with you, was $1.49 million compared to a net loss of $1.39 million for the same quarter last year. Our net profit for the quarter for the Q1 was $1.36 million which included forex gains of $0.96 million as compared to only $0.01 million in the current quarter. Thus our net profit this quarter excluding foreign exchange gain have therefore improved from $0.4 million to $1.48 million and marks a significant improvement in our business profitability. We ended the quarter with a cash balance of $50.39 million after incurring capital expenditure of about $1.76 million during the quarter. Further details are available to you in our press release. I believe the last two quarters have set the stage for a profitable growth with better management of bandwidth and overhead costs. The company’s increasing focus on synergies across businesses should also contribute towards this objective by improving the (audio gap).

Thanks Durgesh, good afternoon everyone. I would like to start by sharing with you how excited I am to be here and to contribute to the Sify’s success story. Sify has tremendous human capital and I am sure that with the process and synergy enhances that we are working on we will see growth and continued leadership going forward. Let me share with you now some of the highlights of our operations in the last quarter. I first like to share with you some of the key events in our portal’s business. Our revenues grew approximately 6% on a sequential basis and 71% over the same quarter last year driven by advertisings, sponsorships, mobile content and e-commerce. Our key broadband content initiative SifyMax went from strength-to-strength, partnering with Zee Television during the quarter for auditions for a popular reality TV show, Zee Cinestars, conducted from the 3,400 plus strong iWay cyber café change. This program was a big hit across semi-urban India and this partnership meant that aspirants from across the country put auditions and uploaded the videotapes from a nearby iWay café. It is leveraging synergistic opportunities like these and given the competitive edge in the Internet phase of India. Another key initiative at discussing the lives of people in Mumbai, which is the financial capital of the country, is the live video darshan, a religious rite with blessings from the famous Siddhivinayak temple on MumbaiLive.in, as well as live video streaming of traffic on key arterial roads and junctions. For the first time, MumbaiLive 24X4 traffic streaming enabled citizens to view processions of devotees proceeding for idol immersion during the Ganesh festival and find their own traveling routes accordingly. The coverage also promised residents of Mumbai to see and check on traffic routes even otherwise. MumbaiLive also conducted India’s first ever Net Jockey hunt, receiving an overwhelming response of over 400 contestants submitting video auditions. The best Net Jockey would be chosen by citizens based on the audition videos of the contestant on the Mumbai Live site. In a similar promotion aimed at becoming the city’s home on the web, Bangalore Live concluded a successful Best Home in Bangalore contest. In this event, homeowners uploaded videos of their home for citizen’s to view and vote for in a first ever initiative of its kind. Mobile internet content from our portal showed healthy growth during the quarter with investments in marketing and technology processes to deliver compelling content seamlessly across mobile platforms. I will not now cover some of the key some of the key initiatives in our Access Media business. We grew the iWay Cyber Cafe chain by over 150 cafes to a total of 3,559 cafes across 164 cities and towns during the quarter, once again accelerating our rate of growth. Progress was made on several fronts in our efforts to leverage our retail presence by offering e-commerce services to customers desiring to make cash payments. We have signed an agreement with IRCTC, the railway’s agency for this e-commerce initiatives to enable the booking of rail e-tickets against cash payments at the iWay Cyber Cafes. Pilot iWays have been initiated and it will take about six months to ramp up the service to over 1,000 cyber cafes. The pilots will help us test the service so that the rollout of the service could be expedited. What needs to note here is that more than a million tickets are booked everyday in India. The Access Media division is also expanding its internet telephony business in to the high volume ITES sector and has signed up over 115 customers over the last few quarters. This expansion is a response to intense price competition from the telephone companies in the retail internet telephony business, which has impacted revenue from that segment. The increase in the registered user base of A3, this is on the online games, India’s first MMORPG game launched by us to over 65,000 users with continued promotion of online games for the game-dromes and cyber cafes. We are also working on the leading online game publisher to create awareness for online games to grow the markets in India. We are also growing the markets for games by practicing in mega youth events like the gaming expo at Bangalore and various college festivals to provide an opportunity to experience the MMORPG game. Subscribers to Sify’s high speed internet access to homes, our broadband service, crossed 200,000 subscribers for the first time during the quarter. Service offerings were rationalized according to user behavior. For example, high bandwidth users are being offered more affordable night-time usage. The focus going forward would be to provide added value to users to bundled benefits and otherwise. We are also in discussions and our sources are rolling out similar arrangement with Western Union for money transfers. I will now briefly cover some highlights in our enterprise services. In response to the rising demand for primary and disaster recovery centers we have established our first data center in India after the first two at Mumbai and Chennai. The new Data Center located in Bangalore is now operational with new business and with a significant amount of business in the pipeline. We continue to have significant business wins across network services, application services, and for services that has digital certificates. Sify is now recognized in the Information Assurance Phase II with wins across the Middle East as well as many financial institutions, recognizing us for our Basel II compliance practice. This brings us to the end of the highlights of operations over the quarter. I will now hand you over once again to Raju for concluding remarks. Raju.

Thank you Suri, while we continued to lead the market in key lines of businesses the focus of our team will now be on accelerating growth across. As you know the market in India continued to grow on the back of the rising economic height in India. Our intention is to capitalize on this growth. However, our ability to scale beyond the growth rate available in India will come from our international services, which is already one of our fastest growing lines of businesses. The total addressable market currently according to reports is above $115 billion. So the potential upside is youth. However, of one thing you can be sure, we will do our best to ensure smart growth in every business so that we can unlock synergies across businesses and grow them profitably. I will now hand over to the operator for questions. Operator.

Thank you. Ladies and gentlemen at this time we’ll be conducting a question and answer session. [Operator instruction]. Our first question coming from (inaudible) Chaudhury of Global Equity Research, please proceed with your question.

Thank you and again of good work on turning the company around on profitability side. Question, in terms of the portal, there is a lot of momentum which is coming because of Web2 initiatives; user generated content, social networking. Does Sify have any initiative on that part? Then I have another follow on question. Suri Venkat: We have started mobile blogs as well as normal blogs on Sify match and that is one area that was designed to push forward during this particular quarter. And other initiatives we will do only after consolidating this.

The other question I had was on the enterprise services business, any headway we are getting -- I was thinking you’ll always have some more customer attraction from say US or Europe that could really give some more boost to your bottom line. Any thoughts on it, do we have any sales people up in these countries and how are we planning tactically to capture the enterprise services business?

Hi this is Raju. So as I presented one of our growth means is international business and there are certain thing we are working in the pipeline which I cannot disclose until we close certain agreements. So there are certain things we are working towards international market.

Thank you.

Our next question is coming from Sameet Sinha of Kauffman Brothers; please proceed with your question.

Thank you. I have a couple of questions. Stating with the enterprise business, can you talk about the changes and comparative dynamic there I mean and Infosys and TCS are reporting strong results, the telcos are getting aggressive on the VPN side and BSNL is also expanding into international IT services, what are you seeing and what's the differentiation do you offer versus some of these large competitors?

This is Raju again. So, as you can see, yes, I agree with you there is a competition coming from all these people, but also if you look at the market share we had in IP VPN, today the award we received, is still -- we are the clear winner in the Indian market. But at the same time you know we are not going to sitting around and the market is growing and more players are coming, that is a healthy sign that means there is a proof that everybody is interested in bigger players. At the same time, being -- we are the leader we are trying to get the bigger piece of the pie.

So what sort of differentiation do you offer versus one of these larger -- comparison. Can you talk about you know contract in your releases that you saw during the quarter?

I think, you know, we are holding all of our customers who -- we have the relationship. And also we are winning the major customers you know we got in the pipeline and you know, secondly you know, our knowledge, our know-how and expertise on this technology much more superior than any competition we have so far. Okay, Suri do you want to comment?

Yeah, one second, just one more point that I’m willing to add them as well, which is that, one major area of the differentiation that we have to offer vis-à-vis the other players in the segment is that we are absolutely carrier agnostic. So whereas any particular company would be offering services on their particular line. We are in a position to offer double lines and double notes, etc. Consequent upon which what happens is there are certain companies, which are into mission critical application and they are not happy to be dependent on one carrier and -- whereas when they the work with us, working just with us they are able to use a redundancy that we build in and provide us a special service.

Our next question is coming from Colin Gillis of Canaccord. Please proceed with your question.

Yes, hello everyone. Can you talk a little bit about the degree of portal traffic that you are seeing, that’s getting push right now from the iWay passage and your potential to increase that?

Yeah, hi this is about Raju again. We have essential -- because if you look at it still India being 60% of the internet usage is coming from the cyber cafes. Cyber cafe is going to continuously play a bigger role to access to the Internet that is our leverage. One thing you saw this is -- again we added 150 plus cyber cafes in the last quarter and we are trying to commercialize much more for a quarter point of view, having to differentiate the technology when the people access to those cyber cafes. So we are seeing benefits of having -- we providing the infrastructure. At the same line, broadband to the home, also we substantially, we cross that 200,000 mark and still we are the private sector being the number one and also that -- also it provide advantages providing the apart from is the differentiation factor.

Our next question is coming from (inaudible) please proceed with your question.

Hey guys, I just wanted some clarification on the Data Center side. Can you give us a sense of your current revenue capacity and your current legalization rate and then kind of your game plan for future expansion?

Hi, in terms of (inaudible) our total current revenue is about, I would say 60% of our capacity and the total revenue is of the order of about $20 million a quarter.

$20 million and this we’re talking about the Data Centers, correct?

Yes -- pardon, sorry, $2 million a quarter is -- just missing a digit -- $2 million a quarter that’s our current revenue and our capacity utilization is about 60%.

Our next question is coming from Louis Corrigan of Kingsford Capital. Please proceed with your question.

Hi, I have a couple of questions. In the iWay private cafés, the growth accelerated this quarter to 159 from about 100 last quarter. But I recalled that in the last conference call you had talked about having 260, they were in the pipeline and that was partially disclosed this quarter. And I guess the rate we still have is a about 200 per quarter. So my question is, are you slowing your growth in cyber cafés and what happen to the extra 100 or so that you had partially disclosed this quarter?

Well, actually in the area of iWays, what we have been focusing is on the profitable growth because that is one area where we want to ensure both Sify, as well as franchisee as a profitable business. And to that end we have made sure that people are very rigorous analysis. Also we have ensured that in the cases where we are present is a plaster approach. In some towns we have just one or two cyber cafés. We have found that it is uneconomic for us to service those in terms of the manpower. So we are going now to sites and cities where there is a minimum market opportunity of N cafés. And that is what is resulting in a lesser than earlier plan growth but I must tell you that 115 itself is not a small number if you consider that our major next competitor has total 250 cafés in the whole country.

At this time I would like to turn the call back over to management for any further remarks.

I beg your pardon.

Gentlemen, we have no further questions in the queue. I would like turn the call back over to for closing remarks.

Closing Remarks. Thank you for joining us on the call and we look forward to interacting with you all through the quarter and around this time thereafter. Thank you and good-bye.

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.