Sify Technologies Ltd (SIFY) 2004 Q2 法說會逐字稿

Good morning. My name is April and I will be your conference facilitator. At this time, I would like to welcome everyone to the Sify second-quarter fiscal 2005 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS)

Miss Viacente (ph), you may begin your conference.

Welcome to all of our participants today. This morning I'm joined on the call by Mr. R. Ramaraj, Chief Executive Officer, and George Zacharias, President and COO, and Anil Ahuja, Chief Financial Officer of Sify Ltd. Following our comments, there will be an opportunity for questions. If you do not have a copy of our press release, please call the Anne McBride Company at 212-983-1702, extension 208, and we will have one sent to you.

Alternatively, you may obtain a copy of the release off 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 webcast in the investor information section of the Sify website.

Some of the financial measures referred to during this call and in the second-quarter earnings release may include non-GAAP measures. The presentation of the most directly comparable financial measures calculated and presented in accordance with GAAP and a reconciliation of such non-GAAP measures of all 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 of the statements contained in the earnings release and on this conference call are forward-looking statements rather than historical facts that are subject to risks and uncertainties that could cause actual results to differ materially from those described. These risks include a variety of factors, including competitive development and risk factors listed from time to time in the Company's SEC reports and public releases. Those lists are intended to identify certain of the principal factors that could cause actual results to differ 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. R. Ramaraj, CEO of Sify.

Thank you, Brandy (ph). I want to thank everybody for joining us today. Let me first touch upon the highlights of the second quarter and then George will provide more detail about the events of the quarter later on during this call. George, Anil, and I will respond to any questions you may have at the end of the call.

Sify had substantial growth during the last quarter. Revenues for the second quarter of fiscal 2004/05 were $18.75 million, which represents an increase of about 30 percent compared to the second quarter of fiscal 2004 and 11 percent increase over the first quarter of this year. Earnings before interest, taxes, depreciation and amortization, or that is adjusted EBITDA, for this quarter, the second quarter, was $1.66 million, a significant improvement from an EBITDA loss of $340,000 during the same quarter last year.

We reduced our net loss in the second quarter to $1.01 million, compared to a net loss of $1.85 million for the same quarter in the last fiscal. If we were to exclude profit from the sale of land that we had held for development, our net loss for the quarter would be 1.35 million, significantly lower than the corresponding loss of 3.5 million like-to-like that we would have incurred in the second quarter of last year. Overall, this confirms the consistent progress that we have been making towards profitability.

We had a positive cash flow of $620,000 from operations during the quarter, after funding capital expenditure requirements of $1.97 million, and we ended the quarter with a strong balance sheet and cash of $32.9 million. We continue to grow our revenues while controlling our costs. In particular, we are continually managing costs of bandwidth, with some hard negotiations from multiple suppliers using technology, processes, and tools to scale up our businesses without having to add many more people proportionately.

We are pleased to inform you that during the second quarter, we added two new very significant customers, a large bank, UCO Bank, and the Oriental Insurance, two major events (ph) in the banking and insurance sectors. The Oriental Insurance order is the largest IP/VPN order placed so far, not just for the insurance sector, but in the IP/VPN market in India. This is a three-year contract, with the first phase alone spanning over 450 locations across the country.

The bank order, the UCO Bank order, is also one of the largest and most sophisticated so far in the banking sector, connecting more than 260 locations. It paves the way for more banks to adopt IP/VPN connectivity rather than lease lines as they do at present.

Sify was awarded the prestigious Frost & Sullivan Market Leadership Award for IP/VPN markets for the year 2003. According to Frost & Sullivan's research, the Indian IP/VPN market was estimated to be over $50 million in 2003, with Sify having 48.7 percent market share.

We grew our base of cyber cafes to over 2000 across 67 cities this quarter, and broadband access subscribers more than doubled to 48,000 subscribers. We believe these wins and the recognition received attest to the quality of Sify's network and expertise, and give us the impetus to continue to grow domestically, while leveraging our expertise with Safe services in the rapidly growing international infrastructure management service business.

This is (indiscernible) significant since we can bring our expertise to the markets which are experiencing robust growth. I would now like to turn the call over to George, our COO, who will discuss our operational results.

Thank you. I shall briefly run through the highlights of operations during this quarter. Sify's Corporate Services division contributed 55.5 percent of revenues for the second quarter. In addition to the two major wins in the insurance and banking sectors for IP/VPNs that Ram (ph) has mentioned, there was additional orders from our current customers into the Emerson, Hutch and (indiscernible), as well as new orders from Siemens (indiscernible), a largely retail chain in India (indiscernible), besides many others.

During the second quarter Sify Assure, our Information Assurance Group operated by the Enterprise Solutions business, expanded its team of information assurance consultants and information security auditors to address the growing need for compliance services. Additionally, Sify Assure won two large contracts for BS7799 certification from two leading IT and ITES providers in south India.

Internationally, we have also made progress in a couple of customer pilots and delivery processes, which we hope will strengthen our credentials in this area. During the quarter, we added a number of key professionals, set up a small sales team in the U.S., and have established key potential sales partnerships.

Our retail Internet access segment accounted for 39.5 percent of revenues in the second quarter. The revenue breakdown for the segment was Internet access at home through dial-up, 6 percent; Internet access at home through broadband, 9 percent; Internet access at iWays cyber cafes, 19 percent; and voice-over Internet protocol from cyber cafes, 6 percent.

The number of iWays cyber cafes increased to 2060 in the second quarter, with services extended to 67 cities. Sify owns 34 of these cyber cafes. The remainder cyber cafes are franchised. There are more than 15,000 PCs in use across our iWays, with in excess of 650,000 users accessing these services. Internet telephony through iWays has also grown substantially over recent quarters, as evidenced by the over 7.5 million minutes of international voice calls placed during the second quarter.

In addition, many corporations are now using our iWays to get updates from their sales personnel throughout India. Examples of companies using the service include Ranbaxy, Transasia, Gillette, Roche, and (indiscernible) Pharma.

Our broadband cyber base increased more than 50 percent during the second quarter. We now have more than 48,000 subscribers utilizing broadband connectivity through a network of over 600 cable and television operators in 34 cities throughout India.

Our Portal segment accounted for 3 percent of revenues in the second quarter. Key initiatives in this segment during the quarter included the relaunch of the Sify mail service with free mailbox space of 100 MB, optimization of key channel pages in the finance quarters. We also promoted the download of ring tones for mobile phones during the quarter.

Finally, we produced additional bandwidth to make our network more robust and capable of handling further growth, and are building the bench strength for our national business. This concludes my review of the second-quarter operations. I would now like to return the call to Ram for a discussion of Sify's overall market climate.

Thank you, George. Overall, the Indian economy is expected to continue growth on the order of 7 to 8 percent this year, one of the highest in the world. This is particularly significant when you consider that the GDP of the country is $600 billion, with ForEx reserves of $119 trillion.

The IT services market is continuing to grow at a blistering pace. The BPO market is also continuing robust growth. All of these are fueling growth of data connectivity. According to IBC, the IP/VPN market in India is slated to grow from about $48 million to date to $181 million by 2008, while the international IP/VPN market in India is to grow at an annual compounded growth of 84 percent, from about $3.2 million currently to $68 million by 2008. The new opportunity, the international infrastructure management services business from India, according to Deutsche Bank is slated to grow from the current $300 million to over $1 billion in just three years.

With our experience in managing over 25,000 devices, we are in a position to offer such services globally, but at Indian costs.

On the domestic front, according to studies conducted by Confederation of Indian Industry, broadband subscribers are forecast to grow from 200,000 currently to about 3 million by 2007, and 10 million by 2010. The Telecom Regulatory Authority of India, the (indiscernible), has just released its broadband policy, where they are looking at a much faster base of growth in the broadband penetration to about 20 million by 2010. With our market leadership and service expertise in these areas, we are well-positioned to capitalize on the growth of these markets.

Over the years, we have demonstrated the ability to grow our business in a very competitive and dynamic marketplace. We have effectively grown our businesses and improved EBITDA and identified new opportunities for future growth. With a focus to rapidly growing broadband Internet access, IP/VPN services, and infrastructure management services, we are looking at areas that are clearly slated to grow in India and internationally. As we move forward, Sify will continue to be an innovator in the industry, which will allow us to compete effectively.

I will now turn the call over to the operator to open the line for questions.

(OPERATOR INSTRUCTIONS) Greg Wegner (ph) with Sify.

Yes, I would like to ask the gentleman what are their concerns -- I have read in the Indian press lately about the government perhaps pulling the IP/VPN license of Sify or other Internet service providers, and what is the risk involved and where do they see this heading?

There has been some large wins for Sify in the IP/VPN area, as we mentioned, against competition from incumbent telephone companies such as BSNL, (indiscernible) and others. As most incumbents tend to do, taking refuge that is there way that this competitive threat from people like us, they are trying to see is a regulatory act possible, and have gone to see whether there is some remedy from DOT.

As far as what about inputs we have received speaking to officials, while there has been a protest from BSNL saying that there is competition from ISPs and could there be some kind of a revisit to what they are doing, the assurances we have received so far are from the Minister and a few other senior officials is that they're looking into this, that this is an integral part of the Internet, and we are waiting to see what the outcome is.

While we think it is serious to pursue from the Company's point of view, it's something that the ministers assured us that we need not worry and business could carry on as usual. We have continued to pick up lines. We have independent of the telephone company for providing the last-mile links thanks to our wireless broadband. So dependence on some of these telephone companies for provisioning these services also comes out (ph), because of which we think that this threat is more competitive rather than regulatory.

Thank you.

(OPERATOR INSTRUCTIONS) Rolf Wagner with Wagner Investment Management.

Yes, good morning. Two questions. First of all, some discussion in terms of what level of capital expenditures you require this year, next year, to reach profitability, and to what extent does the amount of capital expenditure levels influence the annual gains of adding new customers?

This is George here. Let me try and address that question. We think that certain large IP/VPN orders may require us to move to certain new cities or new towns. We are present in most of the larger towns, but this may require us to get into smaller towns. That will increase our level of capital expenditure from what we have had in the past year.

However, we do not think that this is going to be very much higher, so it is not -- let's say it could be at most double what we have spent last year. So that is the order of magnitude unless we get even larger orders. Generally, these orders tend to pay for themselves pretty quickly, and that is because of the way the bandwidth provisioning happens. So under the circumstances, I would think that the level of capital expenditure will be dependent on large IP/VPN orders that might take us to new towns.

The second area of capital expenditure actually for us is when we deploy fixed wireless for expanding our cyber cafe and cable television operator network into more locations. This again is quickly paid for by either deposits that we collect from franchisees or from cable operators. So overall increase in business in this area does not increase our CapEx proportionately.

Okay, one other question kind of related to that -- the level of pricing in terms of adding customers, the elasticity of pricing and also the pricing in relation to the cost structure from the telephone companies.

Right. We expect that both international and domestic bandwidth prices per megabit will continue to decline. We have seen historical declines in excess of 20 to 30 percent year-on-year. We think that this will continue going forward. Some of these price reductions will need to be passed on to our customers, and that is inevitable, but so far the pattern in the past has been we have been able to pass on -- or we have been required to pass on far less in terms of price reductions that we have been able to obtain in terms of cost reductions on bandwidth. This picture could change if one of the telcos were to be significantly different in terms of aggression. So far, there are no indications that that is happening.

Okay, one last question. What is the level or have you experienced any significant impact on your earnings from collectibility? I didn't see anything in your statement discussing the level of bad debts reserve or collectible -- ability to collect from your customers. What type of control do you have?

Right. Our receivables are now 49 days of sales (multiple speakers).

49 days?

49 -- days of sales. We had collections of about 19.3 million U.S. dollars for the quarter on revenues of 18.75.

On the average bad debt, (indiscernible) about 1.5 percent of our quarterly revenues.

1.5?

Based on the revenues and back tax (ph) expense for the last quarter.

Okay, thank you.

At this time there, are no further questions. Are there any closing remarks?

Yes. Thank you all for joining the call and we look forward to speaking to all of you through this quarter and the next quarter. Thank you, George and Anil and Brandy. Good day.

This concludes today's conference call. You may now disconnect.