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Rediff.com India Limited (REDF)

F4Q06 Earnings Conference Call

May 16 2006, 8:30 am EST

Executives

Ajay Menon - IR & Public Affairs Contact

Ajit Balakrishnan - Chairman and CEO

Joy Basu - CFO

Analysts

George Mihalos - Gilford Securities

Joe Jolson - JMP Securities

Rajesh Vora - ICICI Securities

Al Almade - Private Investor

Presentation

Operator

Good morning and welcome to the Rediff.com conference call declaring the earnings results for the fourth quarter and fiscal year ended March 31, 2006. (Operator Instructions) I would now like to introduce your host for the conference, Mr. Ajay Menon, Investor Relations and Public Affairs Contact, Rediff.com India Limited.

Ajay Menon

Thank you, April. Sorry to keep you all holding. Wish you all a very good morning and thank you for being with us to discuss Rediff.com's financials for the fourth quarter and fiscal year ended March 31, 2006.

I would now like to introduce you to the management team present on this call, who will take you through our Company highlights. We have with us Mr. Ajit Balakrishnan, Chairman and CEO; and Mr. Joy Basu, our Chief Financial Officer.

As mentioned earlier, all of you are currently on a listen-in mode only. This conference call will last for about 20 minutes and then we'll be glad to answer any questions you may have.

For your immediate and ready reference we have also posted the earnings release for the fourth quarter ended March 31, 2006, on our website at http.investor.rediff.com. You may also call us at our office in India at 9122-2444-9144. Ask for extension 202 and we will be glad to fax you or email you a copy during the course of this call.

Before proceeding, I would like to mention that during this conference call, except for the historical information and discussions contained herein, statements may constitute forward-looking statements for the purposes of the Safe Harbor provisions and under the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that can cause actual results to differ materially from those that may be projected by these forward-looking statements.

These risks and uncertainties include, but are not limited to, a slowdown in the economies worldwide and in the sectors in which our clients are based; a slowdown in the internet and IT sectors worldwide; competition; the success or failure of our past and future acquisitions; attracting, recruiting and retaining highly skilled employees; technology, legal and regulatory policies; managing risks associated with customer products; the widespread acceptance of the internet; as well as other risks detailed in the latest annual report on Form 20-F, filed by Rediff.com with the SEC.

Rediff.com and its subsidiaries may, from time to time, make additional written and oral forward-looking statements including statements contained in the Company's filings with the SEC and our reports to shareholders. Rediff.com and its subsidiaries do not undertake any obligation to update any forward-looking statements that may be made from time to time, by or on their behalf. These reports are available with the SEC or are available upon request by emailing Rediff.com at investor@rediff.co.in.

I would now like to introduce you to Ajit Balakrishnan, our Chairman and CEO.

Ajit Balakrishnan

Thank you, Ajay and good morning to all present. Let me start with a few words about the environment that we operate under. According to the Central Statistical Organization of the Government of India, GDP growth accelerated from 7.5% last year to 8.1% this year. The services sector, which recorded double-digit growth for the second consecutive fiscal year continued to be the major driver of the economic activity, contributing almost three-quarters of this growth.

The drivers for the internet access growth in India are also heading in this direction. PC prices and broadband access charges will continue to drop. Determined and very well-funded companies have started aggressively competing for growth.

Broadband access, as you well know, are already perhaps among the lowest and the process of conversion from dial-up to broadband is clearly underway in the metro cities. As of now, these trends have to be reported only anecdotally since systematic third party reporting efforts are just getting underway.

On the mobile front, according to the Telecom Regulatory Authority of India the mobile subscriber base in India has now grown to 90 million as of end March. Our own total registered user base stood at 43.05 million users at the end of March 2006, which is a 20% increase over the same number in March 2005.

Turning to our financial performance, our revenues for the quarter were $5.11 million, an increase of 48% compared to the same quarter in the last year. This as you know, has two segments. The India Online portion revenue, which grew by 69% to $3.57 million, and the U.S. publishing business, which grew 14% to $1.54 million, of which approximately one-quarter is now online advertising.

The growth driver in the India Online business and consequently for the whole Company is online advertising. The India Online advertising portion, grew 88% year-on-year for the quarter ended March 2006.

Revenues for our India Online fee-based services increased 32% from $0.73 million to $0.96 million for the quarter ended March 2006. Profit after tax for the quarter was $0.53 million compared to a loss of $0.24 million during the same quarter last year.

The underlying trends of the India Online advertising business all look healthy. We'll look at some of these factors in some detail now. First of all, the number of advertisers on our site today, year-on-year, rose to 156 brands. We see continued increase in average CPM price realizations for banner advertising in the current quarter, compared to the previous quarters. The top 10 advertisers for the quarter account for 49% of revenue, compared to 59% during the same quarter last year.

Six major industry categories are driving our own advertising and perhaps the whole industry. 79% of our online advertising is accounted by these six industry groups. It is led by the consumer financial services, employment, education, matrimonial, fast-moving consumer goods and IT. These are the six categories which dominate online advertising on our site.

An emerging trend is the steady increase in the share of performance-based advertising. All indications are that this trend will accelerate. One of the advantages of performance-based advertising for the advertiser is that it lowers his risk of trying and succeeding in the online advertising area. We have a number of programs underway to respond to these trends.

The first work that we're doing is to enhance the content sensing technology. We've been working on this for some time and the purpose here is to improve the match between what a consumer is seeking and what the advertiser is offering. This, as you know, is a complex mix of art and science and it involves both superior algorithms as well as better understanding of consumer behavior.

Our early test runs have shown a significant improvement in both sector rate percentages at our end, as well as conversions at the advertiser end. We believe much more is possible and indeed may be the key to a lot of our future growth.

Second, Rediff's Classifieds product is a service that allows very small advertisers to get the benefits of online advertising. It has an automated ad creating and uploading front-end tool, which is very easy to use and also a mechanism to receive responses over SMS through any mobile phone, anywhere in India. We're presently running this as a free service, to let remote and small business people experience this service and the initial feedback that we get is quite, quite excellent.

The third step, and it is very important to understand that in an early stage market such as India, commercial searches -- that is searches where users are seeking services or products that they can buy online --such searches are few. This is partly because of the early stage of the user and also because there are only a very narrow range of products and services available to buy online.

In this context, building a search-based advertising model is a little bit of a challenge but it's important to lay the foundation for the almost certain future that it offers. We have a number of entries in this, as you know, and we're making good progress on them. I'll report the progress we've made so far.

First, we have a Fare Search product, which is squarely in the middle of the very exciting set of things which are going in the Indian airline industry, where a large number of low-cost airlines have opened in the last year or so. Former train travelers are now being able to afford flying because of the low cost of tickets. Our tool, which is a pioneer and leader in this country in search and comparison of airfares across all domestic airlines, has been doing quite well.

We have been enhancing it by both making sure that all the new airlines coming on are added on to it quickly and we also make sure that there are new features constantly on it. During these last few months, we've added a way in which you could search for the best fare that you could find, even between two destinations which do not have direct flights and you need to make an intermediate hop across two different airlines; we find a way to find you the best combination.

Another feature that we've added is to let small travel agents upload special offers for the air travel industry. All of these services are under test and under beta, and are starting to do well.

The second service which we are starting to get good traction is a Job Search tool. As you probably know, in early stage markets such as India, one of the largest -- some of the largest numbers of searches going on everyday are for job searches. Now our tool is a way to do with one stroke, if you insert one search term, it searches multiple job sites as well as sites of private companies and government sites which have job openings. This site is getting excellent traction and we've added some new features during this quarter.

These are features whereby human resources consultants and small recruiting agencies can upload vacancies free of cost directly to this job search. This helps these small recruiters reach a wider pool of candidates as well as give candidates a wider range of jobs than what is available on just job sites.

A third area which we're doing a lot of innovation on is the Product Search feature, which today covers a lot of household electronic products. Users can search and compare product features and prices for over 700 SKUs and across five major cities in India.

We have introduced an innovative feature where you can track the price history of each product or brand; it's been introduced for mobile phones already. It allows the consumer to make an intelligent judgment. This product again is in the middle of this consumer retailing boom which is going on in almost every city where there is a new shopping mall coming up everyday, virtually. We've correctly understood the confusion in the consumers' mind and aim to give them a way of figuring out what prices and what products are available.

Finally, our Newshound service. We've often pointed out that this service is a demonstration of our ability to crawl the worldwide web and index it at web scale and speed. The service today is something which we invite you to go and see. It tracks 1,000 new sources and updates itself through a complex set of algorithms every five minutes and segments it into individual categories and presents it on the fly throughout the day and throughout the night. We've had excellent consumer responses on this product. Now we're extending it to make sure that such news is segmented also by state.

As you can see, all these efforts are aimed at building a solid foundation for our search-based online advertising business for the future. Right now, we're aiming to build a greater consumer reputation for these search products and build scale. As broadband access proliferates in metropolitan India, we expect community-based applications to take off, as we have seen with Cyworld in Korea and FaceBook and MySpace in the United States.

We are well aware that while the tools and technologies for building these communities are pretty much the same across the world, individual countries will have to execute culturally different variants answering to specific needs. Our experiments in testing on these concepts continue.

Our VoIP enabled Instant Messenger today includes a video messaging feature and special avatars. Rediff iLand, our Web 2.0 based implementation, introduced a mobile blogging feature where people can use the mobile and upload photographs as well as text from mobile phones. Connexions, which is a social networking platform continues to build a user base, which today has 1.4 million beta testers who are providing us valuable insight.

We also continue to test through a closed user group, a new web-based email service which is an improvement on current webmail services. Today using Ajax, this new service gives you an Outlook desktop-type email experience for webmail.

So these are some of the things that we've been working on. I request Joy Basu, our CFO to give you a closer and more microscopic look at our financial performance.

Joy Basu

Thank you, Ajit and greetings to all of you. Overall revenues for the quarter ended March 31 2006 were $5.11 million, an increase of 48% over the corresponding quarter last fiscal year. During this period, revenues from India Online stood at $3.57 million, an increase of 69% over the corresponding quarter last fiscal year. Revenues from our U.S. publishing business were $1.54 million for the quarter, an increase of 14% over the same quarter last fiscal year.

Specifically, within India Online, our advertising revenues grew 88% over the same period from $1.39 million to $2.61 million; while revenues from our fee-based services increased by 32% from $0.73 million to $0.96 million.

Within our U.S. publishing business, U.S. online revenues grew 39% over the same period from $296,000 to $412,000; while revenue from our print newspaper, India Abroad, increased by 7%, from $1.05 million to $1.13 million. Gross margins during the quarter improved to 76% compared to 62% for the same quarter last fiscal year.

Specifically, India Online recorded gross margins of 89% compared to 78% for the same quarter last fiscal year. U.S. publishing gross margins for the quarter were 44% versus 37% for the same quarter last fiscal year.

For the full year, April to March, overall Company revenues were $18.7 million, a growth of 48% over the previous year. Within this, Indian revenues were $12.17 million with a growth of 86% and U.S. publishing $6.53 million with a growth of 8% over the previous full year. Net income for the full year was $1.21 million, compared to a net loss of $1.43 million. This represents our first full year of profitability for the Company.

Operating expenses during the quarter increased to $3.17 million, compared to $2.3 million over the same quarter last fiscal year. Our operating EBITDA increased to $0.71 million for the quarter ended March 31, 2006, as compared to an operating EBITDA loss of $0.16 million for the corresponding quarter last year. Depreciation and amortization expenses increased to $0.48 million for the quarter compared to $0.21 million for the same quarter last fiscal year.

The net proceeds from Rediff's follow-on ADS offering in November of 2005, some of which is held in U.S. dollar denomination bank accounts, has had a two-way effect. It contributed to an increase in our interest income to $620,000 for the fiscal quarter ended March 31, 2006, compared to $130,000 during the same quarter of the last fiscal year. However, there was a foreign exchange loss of $320,000 upon conversion to Rediff.com's functional currency, the Indian rupee. The loss was due to strengthening of the Indian rupee against the U.S. dollar over the quarter.

Net income for the quarter ended March 31, 2006, was $0.53 million or $0.0196 per ADS as compared to a net loss of $0.24 million, or $0.0092 per ADS for the comparable quarter last fiscal year. For the fiscal year, year ended March 31, 2006, total revenues increased by 48% to reach $18.7 million. This was primarily driven by increased revenue of $12.17 million from our India Online business while revenues from U.S. publishing stood at $6.53 million. For the fiscal year ended March 31, 2006, gross margins improved 73% or $13.66 million compared to 60% or $7.6 million as recorded in fiscal 2005.

For the fiscal year ended March 31, 2006, Rediff's overall operating expenses stood at $11.26 million as compared to $8.62m recorded in fiscal 2005. Net income for the full fiscal year ended March 31, 2006, was $1.21 million or $0.045 compared to a net loss of $1.43 million or $0.0556 per ADS for the fiscal year ended March 31, 2005. Total cash and cash equivalents stood at approximately $53 million as of March 31, 2006.

That concludes our review for the quarter ended March 31, 2006. I will now request Ajit to recap our performance.

Ajit Balakrishnan

Thank you, Joy. Essentially this buoyant Indian online ad revenues which grew 88% this quarter has driven up overall Company revenue for the quarter ended this March '06 to $5.11 million, an increase of 48% over the year. Overall gross margins to date during the year increased to 76%, while trading EBITDA rose to $0.71 million from a loss of $0.16 million, and net income was $0.53 million or $0.0196 per ADS.

We've stepped up our spending on product development and brand development during the immediate past quarter and that is reflected, as Joy has pointed out, in our higher OpEx levels, and we expect to continue to do that.

We have many promising innovations in the pipeline, content sensing technology to improve click-through rates on our online ads, where you can search offerings for finding best airfares, the best jobs and the best product prices. These are all based on sophisticated crawling techniques. All of these will ultimately contribute to solidifying our leadership in the Indian online advertising market.

The end of this quarter is also the end of our fiscal year April-March '06, which as we were happy to note is also the first full year of our profitability.

Before I end I must point out that in addition to the normal financial statements which we normally post, we've received a number of requests that we put together enough information to allow people to model our business. We have created such an Excel spreadsheet-type statement and it's been uploaded on our site and you can find it in the investor relations portion of our site.

We have disclosed many more breakdowns for both OpEx as well as revenue items, as well as separation between India and U.S. businesses. We hope that this will help all those of you interested in modeling to do that. If you have any additional questions on that after you've studied it, please address it to Ajay Menon, our Investor Relations person, and Joy Basu, CFO, who will get back to you.

We are now ready to take calls.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of George Mihalos.

George Mihalos - Gilford Securities

Good afternoon, gentlemen, a couple of questions. Can you first break out the contribution from India Online for mobile revenue?

Ajit Balakrishnan

George, you know the one thing we have not broken down is this group called fee-based services, which has three components. One of which is mobile, the other is subscription for certain premium products, web-hosting products as well as premium email, and the third is online shopping. At this moment for internal domestic market competitive reasons, I am unable to break it out but it's roughly at 30 is a good way to look at it. They are all at approximately 30.

George Mihalos

Also you commented that CPM rates continued to increase. How should we view that going forward? Do you think that having an effect on existing advertisers shifting some of their budget from say Rediff to other sites like a Google for example, which is more aggressive now in keyword advertising?

Ajit Balakrishnan

We are recounting the CPM increase as a post facto case in the sense that our advertisers are showing a willingness to pay slightly higher prices, because many of them come back and tell us that for some reason, ads placed on our site, for mysterious reasons, seem to give them better results.

So I'm not surprised in many ways, because while we really don't have authentic third-party information on it, we do know that time spent by consumers in India on our site is order of magnitudes higher than any other site that you can name here; Google, Yahoo or anyone else. Unfortunately authentic third-party information on this is as yet not available and hopefully soon will be.

We think one of the reasons is because of the climate of the editorial thrust and time spent, which is why people are getting results. I think our price increases are completely in line with our advertiser expectations and we would never ever go one step out of that.

George Mihalos

So we should continue to expect, I guess, modest CPM increases going forward, is that fair to say?

Ajit Balakrishnan

Very modest increases.

George Mihalos

You broke out your employee headcount. How should we think about this, about hiring, going into the next fiscal year? And are you seeing the level of wage inflation, that sort of 15% to 20% that we're hearing so much about within other industries like IT services?

Ajit Balakrishnan

First of all, compensation costs are not actually a great piece of our operating cost; and in many cases, will be lesser and lesser going forward. You must understand that we are very, very, very unlike the IT companies that you know of from India.

We are a company with 270 people supporting a business which at the moment the revenues look relatively small; but the amount of intellectual property getting created is out of proportion to the size of 270. So I can tell you one thing, is it going to become 500 next year? It's just not possible, you can see the trend. Last year's 250 has gone to 274.

So I think we have built all the platforms we need to scale enormously. So we cannot see any significant scale-up of this number. It will all be in a small single-digit per quarter at best, or high single-digit at best for any particular quarter.

Insofar as inflation on salaries are concerned, it doesn't concern us too much, we're not a large headcount oriented company. Our employees already have substantial premiums. We have a stock option scheme that very few people have. Many of our employees have been successful in exploiting some of that. So it's not an immediate concern, George. It's not a major concern in our cost structure at all.

George Mihalos

Okay and last question. Are you guys or anyone else in the industry getting more aggressive with partnering with some of the residential ISP providers in the hopes of being the default web page for say, BSNL or Bharti as they roll out their broadband to the home?

Ajit Balakrishnan

I don't know about others. We've had occasional conversations. I am not sure that that's going to be a major piece of any strategy because first of all, a lot of this broadband penetration is going through the cyber cafes, even today. They are very early adopters. There are some homes, of course, and others are largely going to offices.

Again, uncorroborated -- in the sense I don't have any corroboration or third party information on it -- that shows for 100 new broadband installations being made, a flying guess that I'd make is about 50 are going to offices. It's pointless to have any homepage on those at all.

Another 25 to 30 are going into cyber cafes where you can have any deal with Bharti or BSNL but at the end of the day, the cyber cafe man will decide whose homepage is in there. So I'm not sure that's going to be such a great strategy. I know we've always felt that especially Yahoo has had success on that in the United States and some other countries. But home-based broadband usage is not where broadband is going here, as far as I can tell.

George Mihalos

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Joe Jolson with JMP.

Joe Jolson - JMP Securities

Congratulations on turning profitable there. I just had a quick question on that ForEx that you mentioned. Was any of that related to your operations in the U.S. or was all that attributable to the interest income that was about half pre-tax?

Ajit Balakrishnan

Joe could you repeat that question? Your voice faded a little bit. I think it's something to do with the foreign exchange, is that it?

Joe Jolson - JMP Securities

Yes. Was the foreign exchange loss related solely to the interest income in the U.S. or was part of that related to your operations in the U.S?

Joy Basu

No, no, no. It was entirely related to the interest income. We have dollar denominated deposits and as you know. We raised some capital for money in the month of November from the U.S. capital markets and we park it in dollar denominated deposits in a bank in New York City. That money was earning interest for us in dollar terms.

Now, we as an Indian company and our books have to have balanced and prepared in Indian rupees. So I've got to translate the dollar balance into Indian rupees at each quarter end. But the rupee during the quarter appreciated by 1%. This 1% appreciation means my balance of dollars, the dollars which I have, is less valuable in terms of rupees. It is not related to our operations.

Joe Jolson - JMP Securities

I'm a little confused with that, maybe you can just explain it. When you then translate your results back into U.S. dollars when you report, doesn't that wash that out?

Joy Basu

No, the answer is no. I know it sounds a little silly but that's the way the U.S. GAAP accounting works and I was confused myself earlier. When it gets translated into U.S. dollars but it does not get washed out in the P&L. There's a difference, which is shown in the balance sheet under accumulative translation adjustments. It's accounting.

Joe Jolson - JMP Securities

Congratulations on turning profitable.

Joy Basu

Thanks.

Operator

(Operator Instructions) Your next question comes from the line of Rajesh Vora with ICICI Securities.

Rajesh Vora - ICICI Securities

I want to know what's your guidance for the next year in terms of the revenue and net income?

Ajit Balakrishnan

Rajesh, you know for quite some time now, we have not provided a guidance. So I'm sorry at this stage we cannot give you a guidance. We have not followed a practice of providing a guidance about the future. We do our best to provide you as much information about the present, to allow you to make those conclusions.

As I pointed out at the beginning of this call, on our investor relations site, we have this time posted a little spreadsheet-like device providing you break-ups of revenue and costs for this quarter, the immediately preceding quarters this year and the same quarter last year. If you look at all three of these and make some assumptions, I am sure you can create a view of the future.

Rajesh Vora - ICICI Securities

Thank you.

Ajit Balakrishnan

All the best.

Rajesh Vora -

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Al Almade, Private Investor.

Al Almade - Private Investor

I'm asking is there a possibility that the Company will be listed on NASDAQ here in United States. Is that a possibility in the future?

Ajit Balakrishnan

Excuse me, did you ask is it a possibility that we'll be listed in the U.S?

Al Almade - Private Investor

That is correct.

Ajit Balakrishnan

I am very happy to let you know that we are already listed on NASDAQ and we trade under the REDF symbol.

Al Almade - Private Investor

Well, thank you very much. I was very encouraged with the results of this year and I trust that you'll keep working much more and do a good job. Thank you.

Ajit Balakrishnan

Thank you.

Operator

(Operator Instructions) At this time, there are no further questions.

Ajit Balakrishnan

Thank you very much, thanks everyone.

Joy Basu

Thank you.

Operator

That brings us to the end of Rediff.com’s conference call for the fourth quarter ended March 31, 2006. Thank you for participating in this conference call.

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Source: Rediff.com India Limited F4Q06 (Qtr ended March 31, 2006) Earnings Conference Call Transcript (REDF)
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