Sify Technologies Ltd (SIFY) 2005 Q3 法說會逐字稿

Good morning and welcome to the Sify Limited conference call for the earnings results for the third quarter ended 31 December 2006. I would now like to introduce your host for the conference, Ms. Truc Nguyen, Investor Relations for Sify Limited.

Thank you, operator. I would like to extend a warm welcome to all our participants today on behalf of Sify Limited.

I'm joined on the call today by R. Ramaraj, Chief Executive 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, formally the Anne McBride Company, at 646-284-9426 and my colleague, Christopher [Chiu] 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 Web site 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 Web site.

Some of the financial measures referred to during this 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 in 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 the Sify's Web site.

Before we continue, I would like to point out that certain statements contained in the earnings release and on this conference call are forward-looking statements rather than historical facts and 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 Litigations Reform Act of 1995. 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 principle 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 risk and uncertainties inherent in the Company's business.

I would now like to introduce Mr. R. Ramaraj, CEO of Sify. Mr. Ramaraj?

Thank you, Truc. Good morning, everybody. I'd like to welcome everyone on the call once again and thank you for joining us.

First of all, we are pleased to report a significant improvement in our bottom-line and have reduced the losses with U.S. GAAP to net (indiscernible) $0.01 per share. As for Indian GAAP, however, the results of Sify actually show a profit of 1.6 million for the quarter, including a one-time credit of US$1.2 million. The one-time [increment] represents export incentives which are not recognized as income in U.S. GAAP.

Our top line grew 27% year-on-year with significant contribution from the total business as well as the broadband-owned segment of Access Media. We have decided to focus on three key businesses, enterprise, Access Media, and portals. Each of these will be headed by an (indiscernible) unit head who will be responsible for driving the growth and accountable for the profits of that unit. This will help drive our growth and vision and at the same time will have a flatter organization structure.

George Zacharias, the COO, has decided to move on to a [carrier] opportunity outside Sify. George has been an integral part of our top management team and we appreciate his contribution over the past years. We wish him the very best in his future endeavors.

I will now briefly introduce Durgesh, who joined us early December as our CFO. Durgesh comes to us from Unilever in the Middle East, where he was the Finance Director, overseeing Unilever's business in seven countries in that region. Prior to this, he was in Unilever in India for 25 years, becoming the Finance Director for Unilever in India before moving to the Middle East operations. He will now take you through our financial highlights. Durgesh?

Thank you, Ram. Hello and good morning to everyone.

I shall now go into some details of our financial performance for the last quarter. Our revenues were $26.7 million for the third quarter, which is a growth of 27% in the quarter ended, compared to 27% higher than in the quarter ended 31 December 2004. The sequential growth in revenues over the previous quarter was 2.5%. However, our revenues from services grew by 6.5% on a sequential basis. This would be a more accurate measure of growth in our services, as the previous quarter had a larger-than-usual element of revenues from hardware sales required for us to provision the services to some of our corporate customers.

Our gross margin has improved from 44% in Q2 to 48% in the quarter under review.

Our cash profit in adjusted EBITDA terms for the quarter was $2.25 million, compared to $1.21 million in the preceding quarter.

Our net loss has substantially come down from $1.4 million in the second quarter and $2.1 million in Q3 of last year. We ended the quarter with a cash balance of $25.5 million after incurring a capital expenditure of $3.1 million during the quarter. This amount of our cash on-hand excludes approximately $37.5 million of net proceeds from the closing in January 2006 of the strategic investment by Infinity Capital Ventures LP. So Sify's funding position continues to be strong and we believe adequate for the Company's gross plans for expansion. Ram will now take you through some of the highlights of the quarter.

Thanks, Durgesh.

I would like to cover a few significant achievements during the quarter, starting with our unique ability to influence the overall [human] Internet experience in India, to grow our revenues and use -- that use of these across portals, cyber cafes and broadband (indiscernible). First of all, our portals performance -- revenue for the portals grew 17% on a sequential basis and over 82% growth compared to the same quarter last year. (indiscernible) gain from increases in advertising and sponsorship on the back of a growing array of rich broadband functions on Sifymax.in, our broadband portal. It offers the best content experience for users in broadband. For example, after the very successful Indian Idol (indiscernible) and MTV Roadies (indiscernible) programs, SifyMax is now the exclusive broadband partner of Indian Idol 2. It promises to be even more successful than the first. In fact, it's already becoming the most popular reality show in India. SifyMax not only has the complete (indiscernible) but also exclusive behind the scenes (indiscernible) chats with contestants. Another initiative leveraging our iWays cyber cafe chain being reached will be the chance to videoconference with these participants and contestants from across (indiscernible) metros, any metros, and down across India as part of our exclusive tie-up with Indian Idol 2.

We've also added a new hit show, Sanya from Hungama TV, which was launched with exclusive clips, contests and mobile downloads of episodes. You can see we're betting on broadband to get more and more Indians onto the Internet onto Sify's total offerings.

Another new initiative that's been very well-received is our Cricket video scorecard, which continues to delight Cricket fans by installing, by instantly playing a video of catches, runouts, 6s and 4s almost as soon as they happen and are recorded on the scorecard in real time. All a user has to do is click on the 4 or 6 on the scorecard, which they have opened on the computer as a window to follow the live action. Video clip of the action clips are immediately opened and played for the user. We have acquired the rights from India/Pakistan Cricket [STD] and (indiscernible) being played so fans can continue to watch the action even when at work.

Another significant achievement was the rating of our Tamil Web site as the best Tamil Web site of 2005 by noted writer, Tamil writer and thinker, Sujatha. The rating was published in honor of the (indiscernible) new year special titled Sujatha 2005 Awards. Ananda Vikatan is the largest circulated Tamil weekly and a very popular magazine. Our Tamil portal is not just a transitional to English versions content but developed to reflect the interest, cultural context and literally tradition of each language. Now, being rated the best Tamil Web site is, we believe, recognition of our efforts to ensure compelling content in every language.

At about 39 million Internet users currently, India has less than 5% of its population online. According to the Internet and Mobile Association of India, Indian Internet users are expected to grow to 100 million users over the next two years. We believe that language content will be a key factor in capitalizing this kind of growth and determining leadership in portals in the future. So we've taken the lead in enabling quality language content with our portals already available in five Indian languages besides English.

The highlight of our Access Media initiative and enhancing the consumer Internet experience starts with our iWays network, which takes broadband access to Indians now from 3100 places across 149 cities in the country. The network is already a part of over 1 million Indian lives. Our intention is to take it much further using our world-class network, expertise and tools and experience. iWays are also being successfully presented at centers for eCommerce -- are users for online purchase of railway and airline tickets. This is becoming widely accepted. This will be extended to online shopping, auctions, bill payments, as users become familiar with the convenience of doing these things online.

Co-applications that have seen strong growth at iWays have been online games and Internet Telephony. Online games, which have grown by 50% over the last quarter, are now played from over 1000 iWays, with games-enabled PCs and from 250 game zones, which are special game centers that we are opening across the country. More than 500,000 hours of games are played in our iWays and game zones during the quarter.

(indiscernible) [A3] (indiscernible) [MMO RCG] games from Korea continues to do well, and we look at formally launching it and it reach a critical mass of users sometime hopefully during the April quarter, when we think these students will be in their summer vacation. Internet Telephony usage grew by about 30% over the previous quarter with strong revenue growth witnessed in usage by the fast-growing [ITES] segment. It is an area of focus for us in addition to consumer use at iWays and standalone Internet Telephony (indiscernible).

Our broadband service, Sify high-speed Internet access to home through to over 150,000 as the service has expanded to 83 cities from 125,000 subscribers and 73 cities in the last quarter. We intend to spearhead many more Indians online with the iWays network but also with the cable television operators as franchisees, to take advantage of the home PC growth in the country, which is currently at about 2.5 million PCs according to IDC.

Our Enterprise business unit, which covers managed network service in India such as VPN services, hosting and security services and offshore managed services such as our remote management of IT infrastructure and managed security services, continues to grow both in India and abroad. In addition to customer wins across service lines, the highlight of the quarter of the orders for setting up (indiscernible), a nationwide high-speed grid computing initiative. This will connect the country's prestigious scientific institutes, premier educational institutes, and universities, such as Indian Institute of Science and the Indian Institute of Technology, this high-speed NTLS network across the country. This is the first major win achieved in partnership as the Power Grid Corporation of India, which has an extensive fiber network in the country on its power grid.

We also received global recognition for our remote IT infrastructure management services with Forrester noting our special strength in remote offshore base management of IT infrastructure. Sify has been featured in the Forrester Wave global delivery infrastructure management Q4 2005 among the top contenders offering these services and for international growth and expansion.

I'd now like to brief you on our plans for growth and expansion in the future. We will leverage the recent strategic investment in Sify and our strong financial position to take (indiscernible) personal service delivery business model global. We plan to do this with our expertise, infrastructure and leadership position for both the consumer businesses and the enterprise services, in addition to growing them in India.

We see the iWays cyber cafe chain, its technology, tools and remote delivery of service capability as an opportunity that can be extended to countries that face similar challenges with regard to infrastructure and PC penetration. Similarly, our remote management of IT infrastructure services which has already received recognition and a growing roster of customers, will be augmented with other services that can be remotely managed or delivered. There is already a technology team to deliver -- devoted to delivery of services internationally. It extends our footprint of global connectivity and services as we identify opportunities across both the consumer and technology service lines.

I will now hand over to Durgesh to elaborate on the new structure and also on Sify Communications Limited. Durgesh?

As mentioned by Ram, we have three main business units comprising of Enterprise Services, Access Media and Portals. This structure of strategic business units responsible mainly for topline revenue growth was (indiscernible). However, with Sify having grown over 40% compounded annually over the last six years, each business has now achieved a scale, so now in future, the business heads will not only drive revenue growth for their business units but will also have direct profit responsibility. Rahul Swarup will drive Enterprise Services; Shrikant Joshi will develop the Access Media business to its current size, will grow this business, while Surya Mantha, who will return to India, will focus on building the portals business.

The Technology division represents Sify's core competence for service delivery in terms of the IP expertise, application development capability, processes and tools. Rustom Irani, who held the technology and mergered its capability in addition to developing our world-class network, will now build on this for both domestic and for international expansion.

Sify Communications Limited -- the government of India changed its telecom policy in November as per which they abolished a separate IP VPN license system. The existing Internet service providers who were providing this VPN service have been given an option to migrate to NLD public IND license in order to continue to provide the VPN service. Sify was not eligible for obtaining this license since it has 98% foreign holdings. So in order to comply with the statutory requirement for obtaining this license, Sify has transferred the VPN business to SafeScrypt, a subsidiary of Sify. The value for this transfer of business was determined by a reputed international audit and consultancy firm. This script has now been renamed as Sify Communications with effect from 20 December, 2005. Sify Communications as applied for an NLD/ILD license with a view to operate the VPN service. Sify has divested 26% of shares in SifyComm to infinitely set on Universal Private Limited and an Indian company and an affiliate of Sify's controlling stakeholder.

I will now hand it back to Ram for concluding comments. Ram?

In closing, I would like to reiterate that the outlook for the Indian economy continues to be bullish. According to Forrester, there is increasing use of IT (indiscernible) large, small and medium enterprises in India with increasing demand for enterprise technology services. Internet and mobile association of India expect Internet users to grow from current 39 to 100 million by 2007. Growing international demand for software, IT services, remote managed enterprise and IT infrastructure (indiscernible) of India, as per NASCOMM, is very encouraging and the opportunity to leverage our successful service delivery models for the public Internet access on developing countries also widens our opportunity of growth.

In conclusion, our growth in revenue continues with a scope now beyond that of the opportunities in India. We are (indiscernible) investment into our network expertise tools, total bandwidth and we will leverage these for continued growth and sustained profitability.

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

Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS). George Mihalos, Gilford Securities.

Good evening, gentlemen, and welcome aboard, Durgesh. I guess I will have a couple of questions and I will break them out the business vertical, perhaps.

If we start on the portal front, with the portal business itself profitable during the quarter, excluding any contributions from Sify Refco and is SifyMax itself profitable on a stand-alone basis?

Yes, both. Ultimately, the portal as well as SifyMax stand-alone are both profitable.

Okay. Given the traction that you've been speaking about, do you see any upward movement in your add rates going forward? Can you perhaps comment on the number of online customers you are servicing versus a year ago?

First of all, I think, with the broadband side of the business, SifyMax and the fact that more than 1.1 million people come into the iWays plus 150,000 broadband users. Indian Idol 2, for example, evaluated a number of [pure] portals and then chose SifyMax because they saw that users would be able to see this through broadband and therefore, Sify was the only one that controlled the entire Internet broadband experience. Because of that, SifyMax is able to get far more CPM rates than Sify itself or any other competitor, and we are definitely seeing an upward movement in the CPM rates.

Could you give us a sense as to how big that movement is, or can you not comment on that?

Not yet. Maybe -- you know, this is early; this is the first quarter where we started getting [feeded] advertising on SifyMax. I think we should look at it at least for another three months before we comment.

Okay, fair enough. Then just moving to the retail side of the business, a couple of questions there. How stable do you view your broadband pricing on a go-forward basis?

It has been, over the last four quarters, a drop of about 10% in our ARPU in the last four quarters, in spite of, I would think, more than 50 to 60% drop by competition. We have added (indiscernible) of our other competitors' much, much faster in terms of number of net customer adds during the quarter December. We would, in our estimate, be the second-largest after the Government Telephone Company, in this side of the business at the end of December. Our growth has not been as seriously impacted by the price cuts by some of our competitors. But there has been -- we have dropped our price by about 10% over four quarters.

Can you comment a little bit as to the decline in per cafe contribution to revenue? It looks like some of the browsing revenue seems to be on the decline, despite initiating the gaming program. Can you comment on that perhaps a little bit?

Definitely, George. The number of PCs that we add, we are adding, as you know, close to two iWays a day. We added almost 200-plus during the last quarter. We take the revenues of these new also when we factor in the average revenue (indiscernible) per day. Because of our -- it takes about six months before some of these new iWays, especially in some of the smaller towns, come closer to break-even compared to the ones that we had in the Sify in the past, which is why you're seeing a drop in terms of revenue per PC, per day. That is -- we think that that can start -- if we start putting an age analysis and look at the older ones, we are actually seeing either a same or increase in revenue in those. It's the new adds that are pulling down the average at the moment.

The last question that I have is how do you view, on a competitive landscape, the new recent rulings by the government regarding VPN services and the Voice-over-IP protocols and this new triple-play threat that some of the larger competitors, the BS&L and the [Barties], may be attacking these smaller ISPs with?

I think, as in any ruling with the government, I think there is good news and not so good news. The good news, I think, is that we would be able now to run voice also along with data on the ILD and NLD the side of the business. Our ability to carry voice in our network will actually now go up.

We also, as you know, there is a very big VPO business and (indiscernible) voice and we think that is a great opportunity that we can examine now, both for bringing in our voice as well as managing our (indiscernible) voice in the country. So that is the first line.

On the side of a triple-play, the biggest challenge, as you know, George, is that the cost of bandwidth in this country, whether domestic or international, while it has been falling about 30% year-on-year, is still far away from international bandwidth prices. Therefore, in order to offer good triple play -- take IPTV; while we have the technology today in Sify to offer IPTV, we would have to give minimum 4 (indiscernible) in the last (indiscernible) for the customer to have some level of experience. The costs today that a customer pays is less than $5 for 256 K, and if you have to go to 4 [NBPS], it will be something like maybe $1000 or so -- or 4 [NBPS] -- $1000 per year, so about $100 or so a month. In the current pricing, we don't think, one, some of the DSL technologies currently can do it; two, I don't think the customer can pay when the cable (indiscernible) about 100-plus channels comes at $5 a month. So while triple play is exciting, the bandwidth prices are prohibitive; some of the technologies being used by competition may not allow that to happen quickly. So, we don't think that it is as much a threat.

The not so good news is it is not yet an opportunity for us either in the near-term because the bandwidth prices are still not competitive.

Okay, thank you. Just the final question over here on the corporate end, it sounds like a lot more of your future revenue growth is going to be coming from the international RIM services. Is that correct? What are your plans more specifically to address that market?

George, that is not correct. While we have some very serious plans to go international, in the near-term, we think the majority of our corporate enterprise revenues will come from domestic India. So one, there, as you know, according to Frost and Sullivan and everybody else, we have a commanding market share and we're getting (indiscernible) against competitive bids from telcos even in the last quarter, (indiscernible) the most prestigious orders. On the international side, we are examining the options of both organic and we are seeing whether there is a reasonable inorganic opportunity possible also. But these are just exploratory at this moment.

Okay, thank you.

(OPERATOR INSTRUCTIONS) [Bob Allison] of [Value Price] Properties.

Yes, good evening. Looking at your quarter-to-quarter from September 30 through December 1, I notice that your loss per share went from -28 to -13. Do you see this type of reduction continuing, which would lead to a profit in the next quarter?

As you know, we do not give guidance, but if you look of our last few quarters, all steps are being -- to make sure path to profitability, and the trends are very clear -- that we've been successful in bringing down the losses and actually increasing the profitability quarter on quarter and the trend is very clear.

One other question -- since you are now expanding into other markets, will this lead to even increased profitability down the future as you go outside of India?

I would think -- a couple of reasons why we want to look outside India. The first is I don't want to undermine the fact that the market in India itself is growing and growing quite rapidly after all research reports. So, we will focus on India to make sure we continue to grow in all the leadership marketshares that we have in our business. We're looking at international opportunities because we now think that we have reached a certain maturity in the tools and technologies that we've developed that we think can be deployed internationally, even in our consumer business. If we can do franchise businesses and manage remotely 3000-plus iWays in India, we think it is reasonable that in a country like say Brazil or any one of those other countries similar to India, there could be such an opportunity.

The second is that we are seeing a lot of interest in offshoring remote infrastructure support, and that is an area where we've been working. We have some successes already sitting in India and we think that that is a core strength area for us. With tools that we've developed, we manage already nearly 35,000 devices on our network, many customers domestically and in India on our network, and a few international. We think that this with U.S. revenues or international revenues (inaudible) dollar revenues and rupee costs, we think this will be profitable.

Thank you very much.

Himanshu Shah, Shah Capital Partners.

Good evening. A couple of questions -- what was the employee count at the end of the year?

1900. 1-9-0-0.

Your employees, you had the same employees at the end of September, correct?

That is correct. (multiple speakers).

What kind of employment growth should we look at Sify in 2006, if any?

Our model has been that we would like -- because we run our business substantially using tools and technologies, we think that, beyond a certain level of fixed costs, we do not necessarily have to increase our man power in direct proportion to our revenues. That is part of our unique business model. We're hoping to, therefore, that we would like to keep our increase in man power under 20% going forward, year-on-year. That's our objective.

Couple of other questions -- what kind of revenue growth -- I mean, you guys have grown at 30%-plus for a number of years. Based on the initiatives that you have taken and the kind of reorg that you have done, should we expect the same kind of revenue growth for the foreseeable future?

The market is continuing to stay healthy in India and indications are that the opportunities in India will continue to grow at 30 to 40% year-on-year. We, therefore, as leaders have the opportunity to grow this definitely in that range; we have that opportunity. In addition, we're looking at international opportunities. I think we are equipped to continue to maintain this growth rate; that is our objective.

In terms of your CapEx, I know you made some comments last quarter that we might have seen the top of that but the reorganization that you guys have done, is that going to change or -- I mean, are you going to continue to spend around 3 million a quarter or -- should we see higher or lower?

In order to meet current plans as they are, the CapEx would remain similar. Where we may look at is if we find that we have an opportunity to enter a new market, or the fact that if we do find an attractive inorganic opportunity, that is where you may see some of the capital getting spent that we have sitting in the bank today. But to our other current businesses, we would continue to invest similar to the previous quarter.

Two last questions, one on -- as you look at your three business units that you have now, where do you see the most growth out of the three for the next couple of years?

Because our portals in absolute terms is still very small in India, not just us but all portals, The percentage growth we think would be the fastest in portals. For us, we think that would happen because we think broadband is the way the world is moving, and so is India. We have the control of both the access as well as the content, so we think the number one opportunity we think in terms of percentage growth would be the portal.

The second would be, I think, the cyber cafe and the broadband. Third would be the enterprise.

I know you've kind of talked about there was an earlier question on add rates -- add rates have been going up across the globe at major portals. You thought that you are seeing some growth, but I'm just surprised at how come some (indiscernible) and the other topsides that you guys own haven't seen the kind of an add rate growth. At least I don't see it in the revenue numbers.

Actually, total revenue numbers from last year to this year have grown by 82%. Our (indiscernible) coming because of the number or the increase in the ARPU, or the CPM rates. So you are seeing it, but I think, as the number of subscribers grow, you will start seeing this become more relevant to the advertising world.

If you'd look at this Indian Idol 2,there have been a lot of sponsors because they finally realized Sify is the one that can give both (indiscernible) as well out of the portals a unique experience. (technical difficulty) -- some new kind of advertisers coming in sponsors. Because people are sponsoring the video scorecard, so there are unique ways people are starting to see how this medium could be used. The base build is small relative to a market like yours in the U.S.

The last question is on the -- (multiple speakers) -- on the SifyComm that you guys sold at 26% to Infinity SATCOM, what is the price that it was sold at? What are the proceeds that the Company received?

The total proceeds are of the 26% share is rupees 13, crore (indiscernible) are $4 million approximately, which is the -- and the basis on which it was sold was the book value of this company because, as of now, that company is just like -- (technical difficulty) -- existing subsidiary of Sify but with very little business. So it's like almost one can say a [grim] opportunity. And therefore, what we have sold is at the book value. (multiple speakers).

So SifyComm has a book value of around $16 million, approximately, give or take 1 million?

Yes.

You sold -- (multiple speakers).

(multiple speakers) -- million.

How did you guys determine the value? I mean, why would you sell it? I mean, was an independent analysis done that you -- (multiple speakers)?

That's right.

Okay.

We got it valued by a reputed firm of -- an international firm of chartered accountants and consultants. Deloitte actually -- (multiple speakers) -- Deloitte did the valuation, and the reason why we were forced to sell 26% to an India company was that that was the only way we could apply for the NLD/ILD license. As you must be aware, this notification came sometime in November, and effective the 1 January, we were required to move to this new structure. So, within a very short period, we had to find a local investor, restructure the Company and convince them that it's a good opportunity. So that is the reason why we did it on this basis and as advised by Deloitte.

So most likely, your pro forma cash at 31 of March would be close to 67, $68 million then? (multiple speakers).

Less CapEx in third quarter is what we see. Correct.

I'm sorry?

Less any CapEx in this quarter, Q4.

No, no. I'm just looking at 25.5 million that you had in cash at the end of December, plus you've got 37.5 million from the extra shares that you sold.

(multiple speakers) -- you are right, you are right. I'm sorry, your right.

Plus the $4 million that you are getting for SifyComm. Correct?

That is already included in the 25.5.

Oh, it is? The -- (multiple speakers).

That is right.

Okay, thank you.

We show no further questions in the queue at this time. I'd like to turn the floor back over to our speakers for any further comments.

Thank you for joining us on the call, and we look forward interacting with all of you in this quarter and around the same time next quarter. Thank you, all.

This concludes the teleconference. Thank you for your participation.