Sify Technologies Ltd (SIFY) 2004 Q4 法說會逐字稿

Good morning. My name is Phyllis and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Sify Limited third-quarter fiscal 2004earnings 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 Piacente, you may begin your conference.

Thank you Operator. Welcome to all of our participants today. This morning I'm joined on the call by R. Ramaraj, Chief Executive Officer; 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 the 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 third-quarter 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 all the differences between such non-GAAP measures and the most comparable financial measures calculated and presented in accordance with GAAP, will be made 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. 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 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 turn the call over and introduce Mr. R. Ramaraj, CEO of Sify. Mr. Ramaraj.

Thank you, Brandi. I want to thank everybody for joining us today. First, let me touch upon the highlights of the third quarter and then George will provide more details about the events of this quarter later on in the call. George, Anil, and I will respond to any questions you may have at the end.

We are pleased with the results of the quarter during which we have maintained our growth momentum and for the fifth straight quarter of being free cash flow positive despite additional investments for growth. Let me share the key highlights of the quarter.

Revenues for the third quarter of fiscal 2004 were $21.85 million, which represents an increase of about 33 percent compared to the third quarter of fiscal 2003 and 10 percent over the last quarter. At this point I would like to add that the tsunami that devastated the coastal areas of many Asian countries, including India and our own home state of Tamil Nadu, did not affect our operations in any way. While we are deeply saddened by the loss of life and property, I would like to inform you that Sify's response to the disaster was immediate and decisive. Overnight three broadband internet centers were established in the coastal towns of Cuddalore and Kanyakumari, to facilitate communications for government officials, relief agencies, and the general public. We opened special pages on the disaster on www.sify.com with an online payment gateway in partnership with Citibank. I am happy to inform you that we have raised over 10 million rupees in online contributions towards the relief efforts of the Red Cross and for the Prime Minister's Relief Fund. This is in addition to the personal contribution of many members of the Sify team in terms of money, material, and voluntary work in the affected areas along the coast.

Coming back to our results, earnings before interest, taxes, depreciation, and amortization or adjusted EBITDA for the third quarter increased to $1.85 million, an increase of 74 percent compared to the same quarter last financial year, excluding foreign exchange translation losses. If foreign exchange translation losses are factored in, it translates to 1.09 million, a seven percent increase over 1.02 million in the same quarter last year. We reduced our net loss in the third quarter to $2.2 million compared to a net loss of $2.37 million for the same quarter last financial year. We had positive cash flow of $0.5 million ? 0.47 million to be exact ? from operations during the quarter after capital expenditure of $3.3 million. We ended the quarter with a strong balance sheet and cash of $36.7 million.

We grew our base of cyber cafes to about 2,270 across 69 cities this quarter while our broadband access subscriber base increased from the previous quarter by more than 40 percent to about 67,000 subscribers across 45 cities. We are confident that the capital investments made this quarter in expanding our network to support our large enterprise wins and to establish resources for our international remote infrastructure management services will translate into additional revenue streams in the future. Additionally, the alliance with Global Crossing has started to benefit our customers as they pursue international business opportunities. We continue to maintain our core focus to aggressively drive revenue growth while simultaneously maximizing corporate efficiencies to reduce costs and generate cash flow from operations.

You may have read of a development in the regulatory environment here in India with regard to IP VPN services in our release or in the Indian media. In December 2004, the Department of Telecommunications (DoT) issued guidelines for amending the ISP license to include IP VPN services. This is despite the fact that the current ISP license includes all services over the internet, or their optimization, of which IP VPNs are a part. The new guidelines require an entry fee of Rs 100 million ? that is $2.3 million ? to amend the license, to include IP VPNs, and an annual fee of 8% of adjusted gross revenues. However, the Internet Industry body in India is expected to file an appeal against DoT's decision. We believe there is a possibility that this new development will be reviewed in future. However, in order to eliminate market uncertainties for our IP VPN service business, Sify paid the 100-million-rupee entry fee in early January.

I would now like to turn the call over to George, our COO, who will discuss our operational results. I will then update you with comments on the outlook for our industry and the fiscal fourth quarter 2004.

Thank you Ram. I shall briefly run through the highlights of operations during the quarter. Sify's corporate services contributed 55.5 percent of revenues during the quarter. We had several wins for connectivity services and recurring order bookings from existing clients. New orders for internet connectivity services were contracted by Airtel, Mastek, Cable & Wireless, and India Comnet. Significant wins for IP VPN services were from Nestle, Elder Pharma, and Khaitan. Repeat businesses included Oracle, GE, Satyam, CLI3L, Google, MindTree, Amazon, and MensaMind for internet connectivity services. Repeat orders for IP VPN services included Hutch, Wipro, Perfetti, HDFC Standard Life, and Group 4. Sify further strengthened its presence in the retail distribution segment by integrating 26 stores of Vishal Megamart. Services for Vishal stores in Northern India include video conference and data connectivity between the stores. Another significant win this quarter was for the integration of some broadband connectivity on a VPN of many Hutch shops, a mobile shopping initiative from Hutch, one of the premier mobile service providers in India. Sify's alliance with Global Crossing resulted in new customer wins, which include GECIS, Equinox, and Seaton. Two leading consumer product manufacturers, Pidilite Industries and Perfetti Van Melle India, selected Sify supply chain solution forum for managing their distribution operations in India.

Our retail internet access segment accounted for 39.9 percent of revenues of the Company during the third quarter. The revenue breakdown for the segment was ? internet access at homes through dialup, 4.5 percent; internet access at home through broadband, 9.8 percent; internet access at iWay cyber cafes, 19.1 percent; and voiceover IP, 6.5 percent. The number of iWay cyber cafes increased to about 2,270 in the third quarter with services extended to 69 cities. Sify owns 33 of these cyber cafes. The remainder of these are franchised.

There are more than 17,000 PCs in use across the iWays today with about 800,000 users accessing these services each quarter. Internet telephony through iWay has also grown substantially over recent quarters as evidenced by the over 9.4 million minutes of international voice calls placed on our network during the third quarter.

Our broadband subscriber base increased by about 40 percent during the quarter to more than 67,000 subscribers utilizing broadband connectivity through a network of about 1,000 Cable Television Operators in 45 cities throughout India. Our portal segment accounted for 2.8% of revenues in the third quarter. The highlights for the quarter for portals are as follows ? broadband content services were launched across iWays in 67 cities. Home broadband customers in the top five cities also have access to these broadband content services. Revenues from content services on mobile devices resulted in strong growth of 100 percent over the previous quarter. Sify.com was the first to launch an hourly video news service for users to view crisp video news updates on the hour every hour for users. The number of advertisers on our portal also continues to grow. We have renewed advertising alliances with major online services providers such as Monster.com and BharatMatrimony.com. (ph)

This concludes my review of third quarter operations. I would now like to return the call to Ram for a discussion of Sify's overall market climate and outlook.

Thank you George. The outlook for the Indian economy continues to be positive with every sector reporting growth. The IT services sector continues to grow robustly with many more companies looking to India for outsourced services. The tsunami did not dampen Indian markets and the economy has been resilient in the face of such a major disaster. In fact, India has managed relief efforts on its own, while rushing aid to Sri Lanka and Indonesia. The outlook for the internet industry growth continues to be bright with Forrester (ph) predicting a compound annual growth rate of 37 percent in the PC base through to the year 2010 to reach 80 million PC users. Government efforts to increase e-governance will take many more services online. This will see an increasing number of Indians accessing the internet.

On the enterprise side, Gartner predicts that enterprise spending on information, communication, and technology in India is expected to grow at 16.6 percent in 2005 compared to Asia-Pacific growth rate of 7.6 percent with investments of $22.8 billion. Banking, automobiles, and retail will lead in IT spending according to Gartner. in fact, the banking sector is emerging as the biggest user of IT services with the public sector banks with stand-alone IT functions at branches needing connectivity.

Some of the recent wins that we have reported are in the banking and retail sectors, which are areas of focus for Sify. We have maintained our growth momentum in the last quarter while investing in future lines of growth for additional revenue streams. Our focus continues to be on growth and generating significant cash flows from operations to generate shareholder value.

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

(OPERATOR INSTRUCTIONS) Seresh Mahavivan (ph) of Lehman Brothers.

Good evening, gentlemen. Thanks a lot for the call. I have two questions on your call. One is regarding the license fees. I understand that (inaudible ? background noise ) provided Rs 100 million for the one-time payment. I was wondering if you had to be charged a license fee, do you have the ability to pass it on to your end customers and particularly (ph) for the IP VPN site? That is number one. The second question I want to ask you is, you were earlier talking about a solution that will prevent leakage of revenue in your iWay cyber cafes. I was wondering, out of the 2,000-plus cyber cafes, how many cyber cafes have the solution? Has it been fully implemented in all the cyber cafes VPN (ph - inaudible?)? Thank you.

I shall start with the second question. That is the easy one. The software for preventing revenue leakage on the iWays is there in 100 percent ? all the iWays. On the IP VPN license, the revenue share as of now is eight percent on adjusted gross revenue minus certain costs. There is a lack of clarity fully. We are waiting for more details, which are expected during this month or so. I think it is unlikely that we will be able to pass the entire eight percent to the customer. However, we think that the fact that IP VPN is now a licensed service, we will dispute this through the internet associations. But the fact that it is a license service with certain entry barriers will limit the number of operators offering this service. Therefore, in a way it would be in our interest, therefore, to have?maintain some competitive advantage as we are recognized by both Forrester and IDC (ph) as the clear leaders in this space. Therefore, I think in a way, limiting the number of participants, may end up to our benefit in the medium term.

Thank you (inaudible).

Greg Wegner, (ph) private investor.

Hello gentlemen. Thank you very much for all your efforts with the tsunami victims. It makes me very proud to be an investor in Sify. I am interested in our strategies to compete with the large telephone companies and also Reliance in their consumer broadband expansion plans coming up now. I read in the India media that the large telephone companies think they are going to have one million subscribers by the end of this year. What competitive advantages do we have to keep our customers and to grow our market share in this fast-growing area? Thank you.

I think that is the most relevant question considering the big advertisements that have been put out in the market recently, not by Reliance but by BSNL, (ph) the incumbent telephone company. The broadband policy by the Government was announced a few weeks ago wherein they were encouraging the growth of broadband in the country. That was the good news ? that Government was paying attention to the growth of broadband. However, what they did not do, unlike in the US market, was un-bundle the POP. (ph) Therefore, the POP is now available only to that incumbent telephone company. ISPs and other providers do not have access to the existing infrastructure and have to build their own infrastructure. That is what Sify has been doing all the last two years. And I'll address that. But first to come back to what it is that BSNL is offering.

The first thing is that they have 40 million telephone homes, into which it is looking like a small fraction of that only, may have the quality of being able to provide high-speed DSL connectivity. The Government has allowed them to tender for about half million ports maybe going up to a million. That is the basis of which they have set a target. There is no?there is a form that you have to fill up and a certain process and procedure to become a customer. Therefore, it is not what a customer used to competition likes to do. We go to the customer, not ask them to come to us. Customer support is 24-by-7 in companies like Sify. Therefore dealing with incumbent could be a bit challenging.

The good news is that our pricing on our services is competitive to what BSNL is offering. Therefore, I think on that front?therefore, we should be able to compete with them on the quality of service, on customer support, and pricing.

The way we have grown the business so far, is that on the last mile, we have tried to remain independent of the telephone companies by using wireless to the cable operator. There are 41 million cable homes. We are using our own technology to reach the cable operator, getting the cable operator to leave fresh ethernet into the homes, providing high-speed internet connectivity with the same software that we have used to make sure that the customer logs in securely into our network that we use in the iWays similar software. Because of which the customers are getting no more than cost. They can plug in like they would do in their office on a LAN. So it is ethernet high-speed connectivity working with cable operators. That is what we have been doing for the last year or so. We had a 40 percent increase in the number of subscribers from Q2 to Q3.

Thank you for the very thorough answer.

Sanjay Chowalla (ph) of Kodak (ph) Securities.

Good evening everybody. I just have one question. What do you think would be the impact of the cheaper circuits with ILE (ph) telephony, especially after the HP (ph) dot (ph)? Because the pricing could eventually come down to about Rs 5 a minute. How do you think it would pay off (ph) versus VOIP?

Sanjay, the voice part of our business has been steadily growing both from the iWays and well as from the internet telephony booths that we have set up. What we have found is that because of our MPLS backbone, the technology that we use, the quality of our service is comparable to the total quality that a regular telephone company can give. So the first thing is that the customer sees good quality from us and is hardly able to differentiate between us and tone. We have been pricing our sales aggressively. We are working with two or three good companies in the different markets for termination. We are renegotiating with them. They have been very proactive in terms of their response to help us keep prices competitive. Even today, our prices are as low as Rs 3 to some popular destinations, especially the US, where most of the calls go. We are extremely competitive there. We have the ability to continue to compete with the cooperation of our terminating partners. We see this as, I think, a way in which volumes are actually going to go up because people will not wait for calls to come in. They will now make more calls.

Great, thanks for the answer. I just have one more question. Would it be possible for you to share the RPOs (ph) from your broadband subscriber?

The average RPO from our broadband subscriber is about Rs 500, so about $US10.

Thanks very much.

Sunny Matthew (ph) of Leland.

I am a private investor. Good morning to everyone. I want to know, why didn't you buy back some stock from the market? (indiscernible) have enough cash, right now at 36 million. Because it is going to increase shareholder value. I am a long-time investor. I am investing. I didn't get any return from CV (ph). Last year this stock was around $8 to $9. Now it is only $5-something. I want an answer from you.

Sunny, we haven't thought of that. The cash that we have today, we would like to use to grow the business and make the right investments. We are in three businesses today that are poised for some incredible growth when we look at the reports from Gartner and Forrester and the others. On the broadband and the consumer side of the business ? it looks like a great opportunity there. The enterprise side with the IP VPN and the rest of it ? again, the market is just starting to open up. I think there is an inflection point for growth. The third is based on both opportunity and diversity (ph). We have so far tried to focus on building tools to look at the international market for managed infrastructure services. That is again a huge opportunity, especially if we have customer-facing in the US and calls from India. We have the skill sets. We constantly monitor something like 30,000 devices on our network. We have the expertise. We have the connectivity. Therefore, it's a great opportunity for us to enter, especially the US market to look at some of these. We so far have been thinking of using the money that we have in trying to grow each of these business segments. What I will do is take your suggestion to the Board and then get their inputs and then come back to all of you based on the inputs that we have. Thank you for that suggestion.

Thanks, (indiscernible). I have one more question for you. Come back to Reedis (ph) and Sify. What is the difference? Reedis' share value is almost $8.00 and Sify's is below $6. You keep saying that every quarter you are making only cash profit. When you are going?when is the company going to return to profitability?I mean net profit. That is what the shareholders are looking.

The market cap, even though the share price is about $8 and we are below six at the moment, the market cap is very similar. We are in one part of our business, the portal business, is comparable or competing with Reedis. We have both?we have three or four other businesses that give significantly more revenues than what Reedis gets. Our portal side of the business is less than three percent of our revenues. I think there has been a fair amount of interest in the way the Chinese market has grown in the portal business, especially the mobile side of the business. Our own portal and the mobile side of the business has been steadily growing. The mobile side of the business actually is starting to gain serious traction. We are focusing on ? one is trying to grow content for the mobile. Two is to grow content for the youth. Three is to try and grow content for the broadband customers, especially to our 2,000-plus iWays and the broadband customers. So in many ways we are, as we see the internet market and subscribers grow, we are trying to get relevant content to each segment. We think, therefore, all of this will help us in growing.

In the telecom-related industry, as you well know Sunny, investments have to be made to continue to grow the business. One measure has been, whether the Company's business model is validated, is to see that they are generating positive cash. Because of the continuous investments we make to expand our reach and to come up with new services, net takes a little longer. It is positive cash flow that we have been focusing on. Currently we are at an inflection point where we are maybe two to three years behind China, but catching up fast. This is the time where we really want to grab market share and make sure that we don't loose the leadership that we have worked very hard for over the last three to five years.

Thanks (indiscernible).

Moneesh Dave (ph) of Intouch (ph).

Good morning everyone. I have a question about games. Sify has entered into MMORPG. How it helps in revenue? Can you please answer that.

One of the strengths that Sify has is that we did the (ph) iWays nearly 18,000 or 19,000 PCs that we have spread out, plus 77,000 of broadband customers today. We actually have a fantastic platform for electronic distribution. A number of our users are youngsters wanting to look at this medium for entertainment and education. One area we've seen do very well in Korea and China are online games in the entertainment side. We have therefore, tried to do a couple of things. One is that we have tried to get popular games from all over the world to run in the iWays LAN-based where they compete against people sitting next to them. The MMORPG kind of games are games where you compete online globally against players all over. In order to make that game successful, you need to have a number of people playing concurrently otherwise (ph) it's not interesting. In India there are not that many PCs that have the capability of running quality video. That adversity (ph) has an advantage of a captive number of PCs in its iWays and therefore will we'll be able to run an online games successfully as we get more and more PCs coming out of those iWays that George was talking that we are adding two or three a day.

That growth is going to help us provide games. We have seen that kids play. I believe in Korea they are sometimes physically ejected from these cyber cafes because they don't want to go. They are so much interested in the game. We think that games is a nice way to bring traffic into the iWays. That is really what we are looking at. This will bring increased traffic of the right kind of audience into the iWays and usage of the broadband.

OK, thanks. I have one other question. How much is the revenue from Wi-Fi? Because it is not expanding in other cities than Bangalore?

The revenue from Wi-Fi is zero. It is actually more a brand building in terms of the fact the we provide this in some airports and, as you rightly pointed out, in Bangalore. It is a way we allow people to use. Then they realize that it is Sify that is providing it. We hope they will pick up our broadband and enterprise connectivity. At the moment it is more promotional.

Okay, thanks. That's it.

(OPERATOR INSTRUCTIONS) Jack D. Bave (ph), private investor.

Good morning everyone. A couple of questions. We just saw that while the cash profits have improved, but the nets have not. So is it true that expenses are faster than the revenues? That was one question. Another question is, has there been a drastic increase of employees bringing the employee cost up, especially in the US. The third question is, what is the churn rate of the customers?

Hello?

Yes, sorry. Did you finish the question?

Yes. Three questions. I am finished.

The last part we missed a little bit. You were talking about churn of manpower. (multiple speakers)

Yes, customers, yes.

Customers. Churn of customers. Okay. On expenses, the expenses on comparable business has not gone up. What the expenses that you would have seen has increased is primarily in the area of investment related to international business where we have hired manpower so that we can support some of the larger businesses that we want to go after. Therefore, we have created a core team to go after the huge opportunity in infrastructure managed services. That is remote infrastructure managed services. That is one area of cost where you are seeing that we have this.

The second is that while we compete against telephone companies, many of these telephone companies do not have more than one cable going out of this country. The differentiation that we offer is that we have bandwidth that we have from every service provider or every cable that goes out of this country. In case one cable is down, the customer is not affected. That is again an area where you'll see that we have had another Rs 10 million or so increase in cost. The costs have not gone up. There have been certain investments that we have made in terms of investment in making sure we can support international business as we go forward. George.

I think Ram has answered the first two questions, one about net profit and employee costs. Because the employee costs that have gone up are in international businesses where we have had to create a pledge while we are waiting for the H1B visas that will allow us to go offsite and onshore as well as offshore, in order to do international businesses.

Your third question was about the churn rate of customers. This is different across different businesses. They are relatively low in the enterprise business where, as a result of IP VPNs, which are sticky large-scale engagements, contracts tend to be for a minimum of a year. Some are for longer than one year. Therefore the churn is relatively small. The only reason for reduction in a particular customer's billing relationship would typically tend to be very poor customer service, which is rare in our case, or price reductions, which happen only as a (indiscernible) contract is complete. Then there are some negotiations around that.

As far as the broadband customer base is concerned, it's at an early stage of development. The churn rate is around two percent per month, which is probably something that we will see declining as we go forward or maybe stabilizing at that level. This is reasonable for this level of business (?) (indiscernible).

Thank you.

You have a follow-up question from Greg Wegner, private investor.

Thank you. Could you gentlemen speak to the plan to move the shares of Sify that are in India ? to move them over to the NASDAQ. Perhaps that is affecting our stock appreciation on the NASDAQ. Any comments please.

Sure. As you know, Sify is listed only on NASDAQ and is not listed in India. Current regulation permits us to convert Indian shares to ADRs. (ph) We are currently 100 percent foreign ownership if we so desired. What the Board recommended and the shareholders approved at the last meeting was an enabling resolution allowing this conversion over time. But it is an enabling resolution by which Indian investors, like Satyam Computers, Venture Tech and some of the others who have been there for some time, to have the right or the ability to convert it. It is not a signal to sell. But it is an ability ? that they have at some time the desire ? the ability to convert and to have liquidity. It is more an enabling resolution to provide liquidity and not necessarily a rush to market to offload. It is something that the Government permitted recently and therefore this is an enabling resolution to provide liquidity if they so desired.

Thank you.

(OPERATOR INSTRUCTIONS) Benj Rapattelle, (ph) private investor.

Hi Gentlemen. Good morning. I have one small question. How do you think you are going to sustain the growth of the iWays in these kind of conditions?

As you know, while the number of PCs is increasing in this country, it is not as much penetration as in any other comparable market. We are adding ? last year, that is 2004 ? about three million PCs were added in the country, totally, including homes and businesses. Therefore, there were a number of people who would like to use the internet and connectivity who need access to computer and connectivity. Therefore, there is room for more and more cyber cafes. There are about 40,000-plus cyber cafes in the country, most of them mom-and-pop and not necessarily an organized chain. There aren't any, really, like that. We are by far the largest. We are, at the moment, restricted only to 69 cities. We have won some very large enterprise orders by which we will go to close to 400 cities over the next few months. As we go to these 400 cities to complete the enterprise orders, we have the opportunity to cater for both iWays and broadband in these markets. So that is how we will follow the enterprise customer into newer markets and provide iWays and broadband in these markets.

And another is one question. What is the profitability in these iWays because the price of the telecommunications is not cheap.

We are competitive. As you know, these iWays are franchised, therefore very asset-like from Sify's point of view. We provide the connectivity, but all CapEx is paid for by the franchisee. This quarter, we have actually started generating cash from the iWays from this quarter. They are asset-like and no CapEx goes in from Sify.

Thank you very much.

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

Yes. Thank you all for joining us on the call. We look forward to speaking to you all through this quarter and the same time next quarter. Thank you. Thank you George and Anil.

This concludes today's Sify Limited third quarter fiscal 2004 earnings conference call. You may now disconnect.