Sify Technologies Ltd (SIFY) 2010 Q1 法說會逐字稿

Greetings and welcome to the Sify Technologies first quarter 2010-2011 financial results conference call. At this time all participants are in a listen-only mode. A 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, Christopher Chu of Grayling. Thank you. Mr. Chu, you may begin.

Thank you, Operator. I would like to extend a warm welcome to all of our participants on behalf of Sify Technologies Limited. I am joined on the call today by Raju Vegesna, Chairman and CEO, C.V.S. Suri, Chief Operating Officer, and M.P. Vijay Kumar, Chief Financial Officer of Sify Technologies. 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 Grayling at 646-284-9400, and we will have one sent to you. Alternatively, you may obtain a copy of the release at the Investor information section on the Company's corporate website at www.sifycorp.com.

A replay of today's call may be accessed by dialing in on the numbers provided in the press release, or by accessing the webcast in the Investor information section of the Sify corporate website. Some of the financial measures referred to during this call within the earnings release may include non-GAAP measures. Sify's results for the year are according to the International Financial Reporting Standard, or IFRS, and will differ somewhat from the GAAP announcements made in previous years. A presentation of the most directly comparable financial measures calculated and presented in accordance with GAAP, and reconciliation of such non-GAAP measures, and 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 statements contained in the earnings release and on this conference call are forward-looking statements rather than historical fact, and 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 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 lists 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. I would now like to introduce Mr. Raju Vegesna, Chairman and CEO of Sify. Raju?

Thank you, Chris. Good morning and thank you for joining us on the call. I will commence with opening remarks on our performance for the first quarter ending June 30, 2010. We have realized our objective of introducing pay-as-you-use services in a robust and a scalable manner by rolling out enterprise cloud services, in the form of On Demand Services and On Demand Computer Services. This enables us to improve yields in our data center business as these services sit on top of our basic colocation services. We are delighted (inaudible) the response to our offerings in this niche segment.

With the launch of Sify mylife, our consumer cloud services, we are able to offer a scalable service for our franchises in the consumer space. This allows us to unbundle our previous cybercafe offering into two components, with the different revenue streams, one for the exclusive connectivity services that is flexible, in terms of the number of the connected systems, and the other the only value-add services with the universal connectivity. The consumer cloud enables various stakeholders to plug into the cloud and extract any of the services available for a fee. Our international services are growing in a satisfactory manner. Now I request Mr. Vijay Kumar, our Chief Financial Officer, to take through our financial performance for the quarter.

Thank you, Raju, and hello everyone. I shall now present the highlights of our financial performance for the first quarter of financial year 2010-11, ending 30 June 2010. Revenues for the quarter were $38.63 million, 19.5% higher than the same quarter of the previous year and up 2% over the immediately preceding quarter. Growth was driven by revenues from enterprise services, the data center, managed voice, application services, and systems integration services, all registering growth. International services revenues also registered growth over the previous quarter.

Our most significant challenge is the consumer business, where revenues have been lower than previous quarters. The new consumer initiatives that are being rolled out are yet to show results. Net loss for the quarter was $3.23 million, as against a net loss of $2.76 million in the same quarter previous year. We have a three-prong strategy to be sustainably profitable. While the businesses are working on scaling up revenues on the existing platforms, they and the support teams are working to improve productivity, and cut back on nonproductive costs. The third initiative is to ensure that working capital is more efficiently managed to fund the incremental working CapEx requirements. I will now hand over to Suri, who will take you through the business initiatives during the first quarter. Suri?

Thank you, Vijay. And good morning everyone. We continue to see growth in enterprise service revenues across hosting, applications, managed voice services, and systems integration business. I am happy to announce the successful implementation of the first state data center at Tripura, with another four state data centers getting ready for implementation. We acquired 140 new customers during the quarter, with Network Services accounting for 80 customers. Hosting Services added 14 new customers. 26 for Application Services and Public Key Infrastructure Services, and 20 customers for Security Services during the quarter.

Hosting Service revenues have qualitatively improved, and resulted in higher gross margins due to implementation of cloud services in our data centers. We have deliberately ensured availability of spare capacity to sign up higher yielding customers, [internal] selling colocation services cheaply as a long-term strategy. Our international VOIP business grew 14% over the previous quarter, due to a spurt in the hubbing business. We have added new hubbing routes in southeast Asia, namely the Philippines, Cambodia, and Thailand. Application Services grew across service lines. This includes an E-tendering deal for a five year period from the Government of Maharashtra. The newly-created unique identification authority of India, a mammoth public-private initiative of the central government, has also [reposed] faith in Sify with a testing and certification deal for a period of three years.

There has been a 23% jump in revenues in the Infrastructure Management Services over the previous quarter, due to a one-time implementation revenue opportunity in this quarter. During the quarter, we have also signed up new partnerships that should help us to build the pipeline better. We have added two new customers during this period. The E-learning services grew 8% over the previous quarter. We had three customer additions and no customer losses. Our order pipeline is looking stronger and the order book is healthy as well. While the consumer business revenue trends remain a challenge for us, we are mildly encouraged by the response to our new offerings in the cybercafe space. We have generated very good interest in our partners who own cybercafes, both for connectivity-only services and the vast offerings on the consumer cloud. We now need to wait and see and take this forward aggressively. This brings me to the end of this section. I will now hand over to Raju once again for his closing remarks. Raju?

Thank you, Suri. I would like to reiterate our belief about investing in growth while lowering the costs. We are continually refocusing our business with the expectation that we can provide growth that is both profitable and sustainable over the long-term. The results highlight the efforts to manage expenses in a way that puts us in a good position for scaling up profitably. I will now hand over to Operator for the questions. Operator?

Thank you. (Operator Instructions). Our first question is coming from Jack [Darrianani] who is a private investor. Please state your question.

Good morning everyone, and thanks for taking my call. My question is really I am trying to understand the impact on revenues from the Gulf Bridge International position that you guys signed a few months ago. Can you elaborate on that, please?

The Gulf Bridge project is about an undersea cable that is coming in from the Gulf areas, which connects up with multiple countries in the Gulf area, and has a landing station at Mumbai. So what we have signed up for is to build and operate the landing station at Mumbai. So the revenue opportunities from there are still in the future, because this is a project under construction. And that would be commissioned roughly in August 2012.

Okay. (multiple speakers).

2011, I am sorry. 2011.

Do you guys have some type of a pro forma that projects what type of revenue you can obtain from this project?

At this point of time, it will be a little forward looking, Jack, because the investment has just been signed up. At the appropriate time we will share it.

Okay, thanks.

You are welcome.

(Operator Instructions). Our next question is coming from the line of Don Espey with Shah Capital Management.

Good evening.

Hi, good evening. Good morning to you.

Yes. Why do you folks believe the Company is not getting near the credit your peers are getting from your cloud computing? And what is management doing to maybe push this more to the forefront?

The cloud has just started. And with what other services we have, we are getting into the market. And things take time, the whole people getting into the cloud, owning their own equipment, and we are marketing very aggressively across all the full commerce, but it is taking time to people believe that what they have today can get benefited from the cloud.

And the fact is that we've just launched during this particular quarter, so it is just off the track, off the starting point.

Okay. Okay. Now, how confident are you that you now have the right formula for the consumer business this time? I know that the consumer business has been troublesome for you, but how confident are you that you have the right formula this time?

Yes. Suri here, let me share with you the background, and I will leave it to you to make -- come to your own conclusion. The earlier model that we had on the cybercafe business was based on our own connectivity network. So when the business started off and access to the internet was still nascent, the model itself was excellent, and we had a fair number of cafes across the country. Over the last seven to eight years, access to the net has grown rapidly across the country, both in terms of access at home, as well as access at the office. So the need for people to come to these cybercafes and use the services rendered out there for browsing has typically come down. And in a normal case will also continue to be so in the future.

Our access was impacted in terms of the costs that are to be considered in terms of the cafes themselves, because real estate has gone up, wages have gone up, power charges have gone up. So therefore, with the number of people coming down and the costs going up, the number of cafes that were into this model as a pure browsing system came down, and consequently impacted Sify too. The way Sify could have overcome this would have been in terms of rolling out to more locations by expanding that network. However, that is not the network model that Sify has followed. Sify has always tried to leverage the investments that we try to make on the enterprise side.

Consequently, those are focused and concentrated and it was not possible to really, really expand the cybercafe base. But what we looked at in terms of analyzing where we were was in terms of the strength that we had in terms of the engine at the back end. And we identified that our problem in getting to more cybercafes, and therefore a larger number of users, was on the connectivity front. So we looked into that challenge and tried to see whether we could evolve a technological solution which would make it independent of Sify connectivity. So that is something that we worked on for a period of six months, and we have a technical solution. So today what we have is we are in a position to access any cybercafe that already exists, not necessarily having it to be connected to the Sify connectivity.

At the same time bringing forth the back end solution that we have, along with all its security features. So consequently, any cafe through this solution that we are provided can now join the Sify network, and our endeavor now is to take our back end, build value-added services on top of that, and take that to any cafe in any city. So the number that is out there, the target for us, is over 100,000 cafes. It is now up to us to reach out to these cafes, build up those numbers, and provide the value-added services. We believe it is a great opportunity. Time will tell in terms of how well we do on that.

Okay. Regarding the data centers. Data centers and VOIP clearly seem to be driving the business, and many argue that they are only limited by Sify's financial limitations created by some of the underperforming businesses. At what point do we reevaluate, and maybe sell some of the unprofitable businesses, so we can focus more on the profitable ones, or are we already doing this?

As part of relooking at the way we are doing the consumer business and the changes we are bringing about there, we are already doing that.

Okay. And with the consumer business, what type of target might you have for profitability for the consumer business?

I am not very clear what you mean by that.

Well, when do you expect all of your initiatives to start reaping the benefits, and when do we see the consumer business turning around and breaking even again?

We have numbers to it, I would say a period of 12 months.

Okay. Okay. And I mean the stock has substantially underperformed for a number of years now. We all know this. But most importantly, what do you think you need to do on top of what you are already doing to help the Company's stock price?

Don, we believe that the value will come by performance. And we are all focused on ensuring that we have a good profitable performance. Lots of investments have been done to create the necessary platform for growth, and we believe that once the business is scaled, the performance will automatically take care of ensuring the right kind of values are reflected.

Okay. And I mean the big question continues to be profitability. It has been so elusive for so long now, upwards of five years, what -- with all the restructuring that has been done, how confident are you that you have the right formula right now?

Don, as you have observed, we have been largely investing over the last two or three years in both network and data centers and we have been EBITDA positive. Because of the significant infrastructure investment and prudent policy of accelerated depreciation, we have a positive EBITDA, but we have a loss at the net level. So once the businesses scale up, having created the capacity, I think we will be profitable at the next level as well. At this point of time I am not in a position to comment on the timing of the profit at net level. But given the initiatives which are happening, some of them are niche services, the cloud services which are new, which are high value-added and high margin services, and the initiatives on the consumer business, which should begin to mitigate the losses, I guess in some reasonable point of time we should be net positive as well.

Okay. And the last question we have is for Raju. Since it has been so hard to reach you, I guess I will just ask you now since I have you, but when are you going to be able to grant our request to have a conference call with Shah Capital?

I think -- I am in India now.

Okay.

And I am traveling, so in the last one month I am in India. I am going to be continuing in India for a while, and then once I am back I will get you the meeting with you, a call with you.

Okay. Perfect. All right. Thank you, folks. Take care. Best of luck.

Thank you.

Thank you and good day to you.

Our next question is coming from the line of David A, a private investor. Please state your question.

Yes, thanks for taking this call. I just wanted to check what -- I mean you just notated that you have 140 new clients, customers added, and you have not lost any clients, and also you made some major investments. How do you plan to ensure that the clients that you have can be heading toward maybe to bring in revenue, because 140 clients is a great achievement you have. How do you ensure that you are now having repeat business or profitable growth through these 140 clients?

The 140 clients is about inclusive of the network services, hosting services, application services, et cetera, with a significant number being on the network services side. So obviously the route that we follow normally is that we target for application services where there is a clear high value or high margin opportunity. Otherwise, the entry point is through the network services, and then we try and see how much other business we can fill up with that particular customer. So the fact that we add on network level customers is very important, because after that we are able to look at services through the data center side, as well as the other applications. I mean that is the approach that we take.

Great. Thanks. And one more question that I have, actually two questions. Do you have plans to diversify and get into more higher profitable business like software development, or any of those which will enable you to be in (inaudible) to position yourself with some of the top line players?

I would not make a comparison with top line players in this point (technical difficulty), but as a matter of information, we are already in the software application development business. It started off initially as a team that worked for in-house requirements. A significant number of the applications that Sify Technologies uses have actually been developed in-house. Over a period of time, we have also used that capability to work with clients outside of Sify. In fact, we do some major work with the Government of India. And we are looking to expand those numbers, and as you will be aware in the course of the year, we had separately set out a Company called Sify Software Services, which is 100% owned subsidiary of Sify Technologies, which carries the software development capability within its (inaudible). Hello?

Hello?

Hello?

Raju, are you able to hear us?

Yes, I can hear you.

Operator?

We will move on to the next question, which is coming from Don Espey with Shah Capital Management. Please state your question.

Hi, just had one more question for you. Seems like the consumer business really comes down to the Indian government loosening regulations or not. And what kind of progress have you seen in the last six months, if any, and when do you anticipate the government loosening regulations, so India can compete with countries like China, and the rest of the world?

Don, what kind of regulations are you referring to?

Well, I mean it just seems like the Indian government is, David [Episame] on his blog for years has been trying to coax the Indian government to be more competitive with the rest of the world. What have you seen, and then any important dates coming up to where it may be beneficial for Sify going forward?

Unfortunately, at this point of time, I am not able to point to anything on those lines. What in fact we have been looking for over many years has been unbundling of the local loop from the government-owned telecom companies, which is BSNL and MTNL, which enables other operators to use that particular network. But that has not happened, and on the other hand, these services that are now provided by some of these companies on the consumer side have actually been either subsidized or been provided at a very low margin.

One thing that is happening is that the government in terms of providing greater reach into non-urban areas is trying to use a particular fund that was built up, to enable companies to go reach out into the rural or semi-urban marketplace as far as connectivity is concerned. The other thing that has happened very recently of course, is the auctions that have taken place on the 3G and the broadband wireless access segment, where prices shot through the roof in terms of spectrum access. So in terms of being competitive, I really don't see anything having come through from the government, other than some kind of subsidy that they are referring to now for taking services out into the rural areas.

Okay. Okay. Thank you.

You are welcome.

Gentlemen, I am showing we have no further questions at this time. I will now turn the floor back over to management for closing comments.

Thank you everyone for joining us on the call. We look forward to interacting with you all through the quarter and at (inaudible) times thereafter. Thank you and goodbye.

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