Sify Technologies Ltd (SIFY) 2006 Q1 法說會逐字稿

Welcome to the Sify Limited first-quarter earnings results conference call and webcast. At this time, all participants are on a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Truc Nguyen. Thank you, Ms. Nguyen; you may begin your conference.

Thank you, operator. 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 today by Raju Vegesna, Chairman, Sify Limited, 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 me at The Global Consulting Group at 646-284-9418, and I will have one sent to you. Alternatively, you can obtain a copy of the release at the investor information section of 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 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 on the differences between such non-GAAP measures and the most comparable financial measures, calculated and presented in accordance with GAAP, are also available of Sify's website.

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 that are subject to risk and uncertainties and that could cause actual results to differ materially from those described.

With respect to such forward-looking statements, the Company seeks protections 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 listed are intended to identify certain 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. With this, I would now like to introduce Mr. Raju Vegesna, Chairman of Sify. Raju?

Yes, thank you, Truc, and I would like to welcome everyone on the call and thank you for joining us. Before I will comment anything, let me introduce the team with me in this room -- Durgesh Mehta, our Chief Financial Officer; David Appasamy, Chief Communication Officer; and Rahul Swarup, President of Enterprise Business; Pijush Das, President of Access Media Business; Surya Mantha, Senior Vice President of our portal business; and V.M. Kumar, Vice President of our International Business.

So I will now comment with opening remarks on our performance. I am very pleased to report that our profits grow 200% for the previous quarter to 1.36 million in the first quarter, while revenues grow 29.1%, [while with] the same quarter last year.

More importantly, we are also able to build momentum for the year by growing our revenue for the first quarter over the previous quarter. I will now request Durgesh to take through our financial performance for the last quarter.

Thank you, Raju. Hello, everyone. I shall now go into the details of our financial performance for the last quarter. Our revenues were $28.74 million for the first quarter, 29.1% higher than in the quarter ended 30 June 2005. The sequential growth in revenues over the previous quarter was 2.5%.

Our cash profit and adjusted EBITDA turns for the quarter was $4.03 million compared to $0.32 million in the same quarter last year. We ended the quarter with a cash balance of $55.27 million after incurring capital expenditures of about $6.7 million and $2 million paid towards acquisition of Globe Travels USA during the quarter. Further details are available to you in our press release.

During the last quarter, we invested in a new data center in Bangalore to meet our growing demand. We also completed the acquisition of Globe Travels USA to enhance revenue earning opportunities for our portals and the iWay cyber cafe chain. We intend to continue our growth trajectory by investing in such opportunities, as well as in extending our network infrastructure and reach to service growing demand from both enterprise and consumer segments. Raju will now take you through some of the highlights of the quarter. Raju?

Thank you, Durgesh. I would like to cover a few key achievements during the quarter, starting with our portal business and acquisition of Globe Travels USA. We acquired Globe Travels, an Iowa-based organization engaged in online ticketing and travel-related business in the U.S. India segment, in a deal that includes cash of $2.5 million in addition to the performance-related payouts and stock options.

Online travel is the fastest-growing and highest revenue-generating category in the e-Commerce space in India. Sify expects to leverage its large NRI audience on Samarchar.com, and the distribution reach of its iWays, our cyber cafe chain, to grow the online travel business through this acquisition on both international and domestic fronts.

We continue to hold [the initiative] in the portal space with our broadband content strategy being extended by the city-centric portals. [We] www.MumbaiLive.in, a city-centric broadband website for the city of Mumbai was launched, showcasing (indiscernible) Mumbai-centric video content related exclusively for an online audience.

The videos will focus on city news, events, entertainment, celebrities, lifestyle, commerce, politics, anchored by net jockeys, a new concept successfully introduced in India by Sify. That website also features live video feeds from the Siddhivinayak Temple and other locations, so that devotees can have a live [passion]. Information and news about Mumbai is available as it happens. Thousands of visitors logged on to watch the latest updates on serial blasts that (indiscernible) happened through Mumbai.

SifyMax continues to draw users with exclusive broadband coverage of major international sporting events. For example, the site presented the highlights of the FIFA World Cup 2006 in English, Hindi, Kannada, Tamil, Telugu, and Malayalam for the first time. Extensive World Cup coverage included the Maradona column, videos, highlights, features, picture galleries, contests, (indiscernible) more with the content available in text, images, and video.

Coverage of the French Open and Wimbledon was offered to users with SifyMax being the exclusive broadband partner for [TWI/IZ] in India. Special sections on [EG] with featured highlights, interviews, round-ups, and behind-the-scenes footage. A live scorecard and Golden Women of the 2005 tournament completed the experience for tennis fans.

Sify Max also aims to become the preferred destination of Indian Internet users for Indian film. Part of this strategy is the hosting of broadband websites for the stars. The first such site was launched for the popular Hollywood, [telegral], and Bollywood actress [Rema Sane]. Rema Sane has rapidly become a huge [hot role] and popular actress, and this platform will bring the fans closer to their star. More stars are expected to launch their site on SifyMax, with a number of them already initiated.

Our strategy to promote e-Commerce aligned with [Online Alansis] has borne fruit with the [LBP] Group of Kolkotta to forward its online store, www.TheTelegraphStore.com. Besides a wide range of products from electronics to cloth, gifts, and books and display, TheTelegraphStore will also feature exciting bargain offers on selected products, under the Offer of the Day and the Price Surprise sections. This will be highlighted daily in the newspaper to drive the traffic to the site.

Now I will cover our access business. Our franchise, the iWay chain, grew to 3,400 (sic -- see press release) cafes during the quarter. We are taking a number of steps to capitalize on the distribution reach of the iWays to diversify the revenue stream, and these are expected to generate in the next few quarters significant revenue for us.

This includes a new initiative that offers Internet learning classes for those who have never accessed the Internet, for a fee. This has been tested in Koyambedu and is being rolled out to other such non-metro centers.

Other areas of focus is in the e-ticketing, [showell] services, and other e-Commerce services through the iWays. Booking of railway tickets from iWays is already one of the fasted-growing activities. Airline ticketing, hotels, and holiday bookings, etc. will follow with the launch of such online services by Sify portals.

Intense competition from the telcos created pressure on our volume growth and prices in the retail Internet telephony business. Thus it impacted the revenue. The division is expanding the Internet telephony business into the IT sector and has signed up more than 80 customers over the last few quarters.

In another example of [leveraging] our reach, Sify iWays tied up with Vijay TV to enable auditions of Tamil versions of The Great Indian Laughter Show. Following the tie-up, aspirating contestants from all over the Tamil Nadu and Bangalore walked into Sify iWays to record their audition capsules for the show.

Then, next, subscribers to Sify high-speed Internet access to home grew to over 191,000 subscribers. Increased focus on the broadband business by telcos has in turn decreased the margins in the segment while also resulting in subscribe churn. The division is now working on increasing the range of (indiscernible) that can be offered to these subscribers, like Internet telephony, to increase the average revenues per user.

We grew our user base for online games with A3, India's first MMORPG game, increasing the (indiscernible) user content to over 50,000 with the continued promotion of online games through the Gamedromes and iWays. Sify is also working with the leading online game publications to create (indiscernible) of online games to grow the market in India.

Our enterprise technology services, (indiscernible) managed networks services in India such as VPN services, hosting, secure (indiscernible), and offshore managed services such as our remote management of IP infrastructure, and [manage and] security services continued to grow both in India and abroad.

The new data center in Bangalore has been set up in response to the rising demand for hosting of primary and disaster recovery data centers. This is Sify's third data center in the country after Mumbai and Chennai.

For example Pantaloon, one of India's leading retail companies, awarded Sify the contracts to host and manage its data center operations in addition to the network and security services that Sify provides to Pantaloon, further strengthening the relationship. Sify also has been commissioned to host the core banking application of Andhra Bank for the next five years.

SifyAssure services continued to grow with the second phase of multi-phased detailed risk assessment for a large carrier in the Middle East being concluded. Other key wins included consulting engagements both in India and the Middle East.

The Application Services team continued its thrust on customized Web applications, document management, messaging, and online testing.

(indiscernible) in the digital certificate business in India is expected to continue to grow rapidly due to the launch of the MCA21 initiative by the Ministry of Company Affairs that mandates the signing authorities of the companies, chartered accountants, and company secretaries to digitally sign the documents. For example, engagements of secure applications were received from ICICI Lombard, [Gifco], [Kotak] Bank, Kotak Life, and Tata Teleservices.

That brings us to the end of the highlights that I wanted to share with, across our businesses. I know all you also are excited to know what is -- Ram has moved on to pursue other interests.

I have now taken over as the CEO and Managing Director, and it is our intention to ensure a smooth transition with Ram agreeing to be available to us as a consultant. We would like to -- happy to address any queries you might have with regard to these changes during the question-and-answer section.

Now, I will turn the call over to the operator, to open the line for the questions. Thank you.

(OPERATOR INSTRUCTIONS) George Mihalos, Gilford Securities.

Welcome aboard, Raju. To begin with, on Mr. Ramaraj's resignation, can you talk a little bit about what is behind that? How was his relationship with Infinity? Should we be expecting more of an exodus from some of the existing management team, which is something that some newspaper reports seem to be suggesting?

Let me address this question. Is Ram interested to locate to other (indiscernible) and continue? What are the chance, other opportunities available? As stated in the press release, that is the answer for your first question.

Second question is, is there any [exit] other things? So George, you know in every newspaper you open up these days in how the market is India for the opportunities. One thing I would say is [my engagement] with Sify for the last more than six months, Sify has a lot of bench. That means, what I mean is, in basketball we have a very deep bench (inaudible) organization.

India being such a great pool of the talent, there is a -- people will exit depending upon what is their priorities in their life. The new organization, new management has responsibilities to bring the new people and organically grow the people who have a lot of talent in our organization.

Okay. If we can maybe move on to the cafe business, it seems like you have opened less cafes this quarter than has been the case. I think it is 100 versus 200 typically. Is that what we should expect going forward?

Excluding the Voice over IP, where it sounds like there is some pricing pressure from competitors, what should we expect from the browsing revenue going forward? Why has that declined, given an increase in browsing rates and more of an emphasis on some of the online games?

George, my colleague Pijush is answering that, who is responsible for that business.

Actually we have about 260 cafes waiting for handover, commissioning. This is going to happen in this quarter. So this is a question of you are spreading it over -- spilling over into the new quarter. So there are 260 cafes as of now waiting for a handover. So these will be opened in this quarter.

So to answer more on the question on the [jars] project also, we are putting in a [clean] process to make our access media more expandable with profitability procedures. So during this process, we are making -- where do we invest and how do we invest?

We as an organization very much believe in our iWays strength and our franchise model.

So near term, should we continue to expect those roughly 200 stores, cafes, a quarter? Are you maintaining that pace?

Yes, but it can go (indiscernible) but we are trying what is [mix], expansion with profitable. You know?

Can you give us perhaps a bit more of a breakdown as to revenue from the portal business? By that I mean advertising revenue, e-Commerce, and mobile.

Of the total portal revenue, advertising and (inaudible) accounted for 50% compared to 58% in quarter four. E-Commerce accounted for 24% compared to 20% in quarter four. Broadband content-related revenue accounted for 11%. Mobile accounted for 6%. Travel, which is a new acquisition, accounted for about 9%.

Okay. What do you think it will take to, just in general, as you look at the industry, to ramp up mobile revenues? Does that mean that there has to be a more favorable --?

Exactly. More favorable revenue split between the portal and the telephone company is what we are insisting upon, in order to make sure that the growth is contributing to the bottom line as well.

Okay. Last question. What are you expectations as far as growth for Globe Travels?

We have just started the business. Obviously we believe that this is a market where there is a huge growth and a large base. The US-to-India travel space, where Globe Travel has a lot of strength, itself as a factor is growing by more than 20% to 25% a year.

In addition we also believe that there will be growth coming from domestic business, although it will take some time for us to ramp that up. Plus there will be an opportunity for us to grow in allied areas like hotels and cars.

So we expect that the growth rate will be very significant; certainly it will not be very (inaudible) lower or higher than our portal growth, which as you know is almost 100% a year rate. Obviously this business may not match that. But certainly it will be a very large growth on a good size.

Okay. Thank you, gentlemen.

Sameet Sinha, Kaufman Brothers.

Raju, if you can, as the new CEO, can you list your top-seed priorities for the Company as you see subtle changes being made in the management structure, plus some top-line initiatives or even bottom-line growth initiatives?

Basically, what is our mission? It is not -- we are not changing much. Basically what we are making is (indiscernible) expanded with profitability. So in all the businesses we have, like our [express] businesses, our access media, our portal, and the international business, we are investing and we want to grow each business with expansion and profitability. So we are looking at each business, where we can grow.

Can you talk about what are your goals for -- even two or three-year goals for growth for top line for each of your businesses?

That is (indiscernible) to predict at this point, but we want to grow as much market expand (indiscernible); and we don't want to leave anything on the table.

Okay. So any other priorities? You said expand profitably. How about any second priority or third priority?

Basically, one other thing also is Sify (inaudible) a majority of the focus now is domestic. One of the things we want to expand more is international. We're developing this technology for the Indian market. Because [what are] reasons Sify (indiscernible), we didn't focus much outside the India market.

So that is one of the areas we are going to focus and [amortize] in our cost to get this market, and [leverage] that our knowledge, how we [did] Indian market. So that is one of the things we are going to focus, beyond the Indian market.

Okay. In terms of Globe Travels, you spoke about a cash payment of about $2.5 million, and the rest in earnouts and options. Could you talk about what they have done historically in revenues and EBITDA, so we can see what the pro forma growth has been? How much of that benefited this quarter?

Durgesh?

Yes, Sameet. The Globe Travels' revenue in the full year last year was approximately $1.1 million and EBITDA was around $400,000. That was the business that we have bought for about a little less than I would say $4 million.

Comparable portal businesses have been valued much higher. But we were able to negotiate this deal very economically and favorably, because of our ability to give him stock options which are perceived at very high-value by the seller.

How much of that benefited this quarter? Can you talk about that?

Well, the revenue of portal business -- sorry; travel business in this quarter is only 6 million rupees, because we have accounted for the acquisition as of end May; so this was a very short period.

In terms of timing, it was more or less end of the booking season, because most of the travel booking from U.S. to India -- therefore travel which happens in July-August vacation period -- happens in either Marsh or April. So the booking all happened during that period. Therefore, the accounts do not reflect the real peak time.

Okay. How about the broadband access business? Essentially your being an ISP to the home. How is that progressing?

I haven't seen the press release, but could you talk about subscriber numbers there?

Well, as mentioned, the total number of subscribers have gone up 291,000 compared to 183,000 at the end of last quarter. As you know, this quarter was more of a vacation period in India, so that was the time when a lot of new subscription does not usually take place. But we expect that the rate will get accelerated. It has already in fact started going up quite significantly from July onwards.

Okay. In terms of when we had met a couple of weeks back, you had mentioned about taking a -- you were essentially talking to your employees currently and looking at performance-based metrics to be put in place, rather than across-the-board salary increases. Can you give us an update on that initiative?

Yes, the one of the things we are looking at is the Company responsibilities and the performance-based compensations we are putting in place. We are hoping to do that, [being] implemented as soon as possible.

Okay. One last question. Raju, are you going to be based out of your office in California? Or do you think you're going to move your home base to Chennai now?

I will be where is the Sify business. So it is of course now in the Indian communication world, you know? So where are the customers? Where are the business? I will be there.

Okay. Thank you very much.

[Greg Wegner], a private investor.

I would be interested in any comments you have on the government license procedures going on now. I read yesterday in the Hindu Business Line that the government may put a hold on our license because of some gray market activity. Could you talk about those issues of getting government licenses and how we're going to proceed along? Thank you.

Well, I think there is some misunderstanding in terms of the report. We did not believe the government has either stopped or discontinued issuing of license as far as our license application for NLD/ILD license is concerned, which only will regularize the activity that we already doing.

We have already got FIPB clearance in Sify Communications Ltd., which is a 74%-owned subsidiary of Sify. The license is in the last stage of issuance. In that, we have been advised how much fees we have to pay and which we are in the process of depositing. So it is just a matter of certain formalities and procedures before we really get the license. So I did not believe that the government has either stopped giving fresh licenses or put any kind of hold on existing licenses.

You must remember that we are already operating these services in our capacity as ISP, which was permitted to provide these services. There was a change in the rules whereby a different license was required to be obtained. The government has throughout assured us that they will not hamper our ability to provide the service to the customers because of this bureaucratic change.

Fine, thank you.

(OPERATOR INSTRUCTIONS) Luke Sito with Sedna Capital.

This is Rengan Rajaratnam from Sedna Capital. Can you just talk a little bit about the online games and when you think it will be a meaningful portion of revenue?

Are you aware -- [you've] got to be -- we are a publisher for A3?

Yes.

We have not yet commercialized this, but it is at the last stages of we are probably going to commercialize it in the next 10 days.

We think that this business offers great potential. We have reached quite high levels of concurrency. Our registrations have gone up.

We are looking to have a portfolio of online games. Right now, we have only A3 in our portfolio, but we think that the field offers great potential.

Any metrics you can share on concurrent users or peak users?

At the moment, our peak users -- minutes used is about -- last quarter it was about 400,000 in online gaming, 400,000. It is 3 at the moment. Number of (inaudible) last quarter was [about] -- registrations was about 53,000.

Concurrency was about 400 only. At one moment, 400 people doing the game. This is expected to go up, and this gives us a belief that there is a potential in this field.

Thank you very much.

Madhu Kodali with Fertilemind Capital.

Welcome onboard, Raju.

Thank you.

I've got a couple of questions. I was wondering if you could touch a little bit on two things, broadband access and portal advertising. If you can give some light on what is market growing at today in India? How is the competitive landscape? What is your market share? How are the pricing trends? I would appreciate it. Thank you.

We are the third-largest ISP. I mean in terms of broadband connections, we are the third-largest in India and the largest private player. Therefore, we have about a membership of about [one lag 91,000], and we expect to grow to about 350,000 at the end of this year. So those are the figures we are looking at.

The 350,000 are broadband connections, right?

Yes.

What is the total market connection?

The market is a little over 1 million as of now.

And the largest player is obviously BSNL, the government.

Right. How is the pricing pressure? Is there a pressure at all, or has it already reached the bottom at this point?

I think the pricing is not an issue. I think there is a different kind of class of people, customers, who will take a different kind of solution.

I think as India people's wealth and economy is growing, people are trying to use Internet. People will pay different kind of [products] for a different people.

We are seeing this competition in the markets where we're competing at the low end, but there are the products and the strategies we are coming with for broadband for a different class of the customers. Price is not an issue.

What is your current pricing right now?

Actually, one looks at the average revenue per user.

Sure.

Average revenue per user for the industry is about 210 rupees. Sify's average revenue per user is 332 rupees.

Okay, all right. From a competitive standpoint, are you stronger in certain markets versus other companies? Are you focusing --? What is your focus area, I guess, from a geographic standpoint?

On broadband access, obviously, we are concentrating on [40] markets where we think the PC penetration is the highest.

Okay, all right. Can you talk about portal business advertising? Despite all the growth talked about, I think the revenue doesn't seem to catch up.

Portal business, as I mentioned a little earlier in response to another question, we had a sequential growth of about 17%, and growth compared to last year was about 9% to 6%. The growth has happened across the board, in e-Commerce, in advertising, and also in the interactive service, as well as in the travel business which we have just acquired.

Our strategy as Raju highlighted is to focus on broadband content. In SifyMax we have had several new initiatives including BangaloreLive, MumbaiLive. We have taken a leadership stance in terms of the kind of initiatives that we are bringing, like the World Cup in local language; and that has made a big difference because soccer is becoming now very, very popular in India, and there are a lot of people who do not follow English but who would still be interested in the game.

Similarly, we have made exclusive tie-ups with all the three big television channels for content. We are also having several tie-ups with the film fraternity. Initially we were having tie-ups with Hindi film producers, and now we have our even (indiscernible) regional filmmakers.

So overall, our strategy continues to focus on three areas, which is entertainment, which includes movies, television, sports; e-Commerce, where we are taking a very strong position with travel; and lastly, e-Learning for which we should be seeing more initiatives in the next one or two quarters to come.

How is the pricing trend within advertising? Is the focus more on banner advertising? Or are you moving it to more of a pay-per-click model?

Are focus is almost entirely on banner or a CPM basis. Actually, if you look at our ability to monetize our paid views, we have a disproportionate share of the advertising revenue in this country. Given that we are -- while we have a very healthy e-mail base, we're not an e-mail centered portal. We are a very content and commerce oriented portal.

We have a very healthy share of the online advertising pie in this country, which is growing at a very healthy rate. But it is growing from a small base; and the entire revenue base is not more than 200 (indiscernible) rupees. So we actually have a very healthy share of the online advertising pie.

Our advertising rates are very competitive with our competitors like [Edif] and Yahoo in the 125 to 150 rupee CPM range. We work almost exclusively on a CPM basis.

One of the things that I would like to add, building on what Durgesh was saying about our focus on broadband entertainment, is that we will move beyond simple banner advertising into video advertising, video banners, as well as television commercials, which are perfect for online videos.

You will see that we are already beginning to evangelize that in the Indian marketplace with media (indiscernible) and big [FMCG] clients. That will take a little time, but that is something that you should see over the next few quarters. That will also reflect significantly in our advertising revenues.

That is an area where we have taken the leadership. Today, we are the only game in town as far as broadband portal is concerned.

Joel Cameron with Nordberg Capital.

Yes, good evening. Before I ask my question, I would like to point out that your timing on reporting your June quarter seems to be somewhat tardy. I got this report 10 minutes before your conference call, so I cannot really look at it. I went on your website, and your June quarter isn't on the website. So I wonder if you might look at that and review that and possibly change that, so that we would have time to look at the numbers, so that maybe we don't ask such stupid questions.

I would like to apologize for the delay. We had in fact sent it out to Business Wire much earlier, and I think there was some technical problem in its distribution, which is why we waited a few minutes before starting the conference call as well. We will be much more careful in future, for sure. Thank you.

Well, Reuters says 12.48, I presume that is 12.30, 12.48 midnight, or that is 8.48 our time. The difference is about 8.5 hours. But you have got 8.5 hours' lead-time to put this out.

All right, let me get to my question. I noticed in your quarter '05, these numbers seem different than when you first reported it. I.e., the Enterprise Services were reported today at 12.00 million; whereas last year it was reported at 12.66 million.

Access media was reported at 9.01 million and last year you reported 9.50 million. Portals was 730,000 versus 770,000. And the others was 520,000 versus 550,000. So can you explain to me the revision downward from last year's reported numbers in the four categories, please?

Joel, actually we use a comparable exchange rate for (inaudible) but our results are in Indian rupees. So last year for June quarter, when we published the results, the currency translation was at 44.48 rupees. Sorry; this was at the end of March quarter. At the current quarter end, the rupee has weakened, so rupee is equal to 45.87 rupees to $1.

Similarly, at the end of June quarter last year, the rate was different, and that accounts for this smaller variation between the numbers that are presented now [versus] what you might have seen in the press release at the end of June last year.

So am I to take that as each quarter comes along, I will see an adjustment from the previous year's quarter?

Yes, sir, because our results are in Indian rupees. So the comparison is done at the same exchange rate in order to reflect the same percentage growth as in Indian rupees.

Okay, fair enough. Thank you.

Gentlemen, there are no further questions in queue.

So thank you for joining us on the call. We look forward to interacting with you all through the quarter, around this time thereafter. Thank you and goodbye.

Thank you.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.