Rediff.com India Limited F1Q07 (Qtr Ending June 30, 2006) Earnings Conference Call Transcript (REDF)

Rediff.com India Limited (REDF)
F1Q07 Earnings Conference Call
July 20, 2006 8:30 am ET

Executives

Ajit Balakrishnan - Chairman and CEO
Joy Basu - CFO
Ajay Menon - IR & Public Affairs Contact

Analysts

George Mihalos - Gilford Securities
Sameet Sinha - Kaufman Brothers, L.P.

Presentation

Operator

Good morning, and welcome to the Rediff.com conference call declaring the earnings results for the first quarter ended June 30, 2006. During the call, all telephones are in a listen-only mode. After the call, we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to introduce you to your host for the conference, Mr. Ajay Menon, Investor Relations and Public Affairs Contact, Rediff.com India Ltd.

Ajay Menon

Thank you, and a very good morning to all of you. Thank you for being with us to discuss Rediff.com’s financial for the first quarter ended June 30, 2006. I would now like to introduce you to the management present on this call, who will take you through highlights of our company’s performance.

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 about 20 minutes, and then we will be glad to answer any questions you may have.

For your immediate and ready records, we have also posted the earnings release to the first quarter ended June 30, 2006 on our website at http:investor.rediff.com. You may well also call me at our office in India at 9122-2444-9144, extension 202, and I will be glad to fax 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 provision and under the Private Securities Litigation Reform Act of 1995.

These statements involve a number of risk, 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 [e-mail].

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. I would like to illustrate some highlights of the latest macroeconomic performance and the environment we operate in.

According to the Indian government, companies [inaudible] organizations currently perform strongly during the fiscal 2005-06. Built by a sustainability in the district [inaudible] according to the advances of this organization where [inaudible] grew by 8.51% in 2005-06 compared to 7.5% in ’04-05.

Sales in sectors is recorded that the [inaudible] growth for the second successful year continued to be the major driver of economic activity. The growth in the new Internet user base is intelligent, marked by the increase in PC penetration, and consequently to its subscribers.

According to the Manufacturers’ Association of Information Technology, personal computers penetration in India has tripled from 6 per 1,000 in fiscal 2000-01, to 18 per 1,000 in fiscal 2005-06. This organization believes that PC sales will grow at a compounded annual growth rate of 30%.

Contributing factors to growth in PC sales and consequently, Internet subscribers, include:

• A decrease in prices of better quality internet access, as in broadband, from one of India’s leading national telecom service providers; and
• Lower-priced PCs.

According to a study conducted by an independent market research company, the growth in both the number of PC owners and Internet subscribers originating from metropolitan cities, where those cities have a population over 1 million, across India is not just limited to the just top 8 cities but is also being witnessed in smaller cities across India.

On the [inaudible] front, statistics provided by the Telecom Regulation Authority of India show that India has more than 100 million [inaudible] subscribers as of May, 2006. According to TRAI, the provider to [inaudible] base grew by 15 million subscribers during the first quarter of the [inaudible], which is a nearly 4% increase over the same period for the [inaudible].

This base accordingly provides a stronger base in India [inaudible] 6 million as of June 30, 2006.

Our total registered user base hit 45 million users at the end of June, 2006, which is a 20% increase over the same number for June 30, 2005.

Focusing on our performance for the quarter, revenues for the quarter were $5.78 million, an increase of 37% compared to the same quarter last year. This is broken into two broad segments -- India Online revenues, which grew 52% to $4.06 million, and revenues from U.S. Publishing, which grew by 12% to $1.72 million.

Gross Margins during the quarter ended June 30, 2006 stood at 78% compared to 69% during the same quarter in the last fiscal year.

Net income for the quarter was $1.98 million, or $6.82 cents per ADS, compared to a net income of $53,000, or $0.20 cents per ADS during the same quarter last fiscal year.

To capitalize on this rapidly growing user base, the company continues to invest in developing services.

We launched a beta version of the popular web-based mail service with new features that provides users an experience akin to the Outlook desktop client. These features include, but are not limited to, the ability to search for mails or attachments, dragging and dropping mail, and auto completion of email IDs of [inaudible].

To internet users from smaller cities, use of their mother-tongue in a communication service like email is very important. Rediffmail is currently available in 11 Indian languages.

Usage of the VoIP-enabled Rediff Bol Instant Messenger grew steadily, with a 40% increase in the number of unique users during the quarter compared to the end of March, 2006.

As we mentioned earlier, in the [inaudible] smaller base and India has [inaudible], and mobile users forming a potentially sizeable user base, a beta version of Rediff Bol is now available for all WAP-enabled mobile phones.

We are also currently testing a downloadable client on Symbian OS-based mobiles within a closed user group.

We launched a new home page with Web 2.0 features that enhance usability and browsing experience for online users. There are three distinct sections in this new home page:

1. “Directory of Services”, with newer additions for a focused and faster selection of services. The new additions reflect on increased [reach] and [Rangor] services.
2. “Search” which helps users seek out airfares, jobs, ringtones, classifieds and electronics in three simple steps; and
3. The Internet has redefined the ways that people connect or communicate, making it possible to meet new users, new people and excellent ideas. The “Featured Users” section now enables greater community participation through blogs on iLand, or by searching and networking with people using Connexions.

Rediff Classifieds, our performance-based ad platform that allows very small advertisers to get benefit from online advertising, has become now the leading online classified channel in India. At the end of June 30, 2006, Rediff Classifieds had 149 categories of ads and more than 130,000 listings.

Our range of local search products saw increased usage during the first quarter of the fiscal year, over the prior quarter ended March 31, 2006. This is also bearing to the growing traffic to our website.

Fare Search, which enables users to search and compare lowest airfares across all domestic airlines, reported an 87% jump in the number of searches conducted during this quarter, compared to the sequential quarter.

Job Search, which allows users to choose from over 400,000 jobs across 100 sites, saw the number of searches conducted increase by 77%.

Our suite of local search products that reported growth include:

• Product Search, which allows search and comparison of product features and prices, including a “Price History” feature;
• Connexions, a platform for locating people for business or social opportunities; and
• and a Ringtone Search facility.

To capitalize on this page view and search growth, we are progressively deploying improved and enhanced content-sensing technology across our world wide web and search verticals that will allow better match ad content with user needs.

Branding and advertising -- in order for us to grow the Indian online advertiser base and increase our depth of business-to-consumer and small-to-medium advertisers, we are focusing on developing three key channels: Direct Sales Agents, who recruit advertisers; Reseller network to service existing advertisers; and the self-enabling Rediff Classifieds platform, with an easy-to-use ad-creating a front-end upload tool.

Our own advertising sales team will continue to focus on more established brands, larger corporate houses, and major online and other ad agencies.

We launched a national advertising campaign to promoting our new and enhanced Rediffmail across more than 20 television channels and select outdoor locations. This is being supported by our active PR initiatives.

Now I will turn it to Joy Basu to take you through our financial performance for the quarter ended June 30, 2006.

Joy Basu

Thank you, Ajit, and greetings to all of you. Overall revenues for the quarter ended June 30, 2006 were $5.78 million, an increased by 37% over the corresponding quarter last fiscal year.

During this period, revenues from our India Online segment stood at $4.06 million, an increase of 52% over the corresponding quarter last fiscal year.

Revenues from our U.S. Publishing segment were $1.72 million for the quarter, an increase of 12% over the period.

Gross Margins during the quarter ended June 30, 2006 improved to 78% compared to 69% during the same quarter last fiscal year. Specifically, India Online recorded gross margins of 88% compared to 83% for the same quarter last year.

Operating expenses during the quarter increased by 33% to $3.58 million compared to $2.69 million for the same quarter last fiscal year, primarily due to higher product development, advertising and marketing costs.

Operating EBITDA increased to $0.95 million for the quarter ended June 30, 2006 as compared to an operating EBITDA of $0.22 million for the corresponding quarter last year.

As you are aware, operating EBITDA is a non-GAAP measure and we will direct you to our press release dated July 20, 2006, that sets out a reconciliation of operating EBITDA [inaudible].

Depreciation and amortization expenses increased to $0.57 million for the quarter, as compared to $0.28 million for the same quarter last fiscal year.

The net proceeds from our follow-on ADS offering, which are held in a U.S. dollar denominated bank account, had a dual effect: it contributed to an increase in our interest income to $0.85 million during the fiscal quarter as compared to $0.11 million during the same quarter last fiscal year.

There was also a foreign exchange gain of $0.77 million during from the conversion of U.S. dollar balances to the functional currency being the Rupee. This was due to strengthening of the U.S. dollar versus the Indian Rupee.

Net Income for the quarter ended June 30, 2006 was $1.98 million, or $0.0682 per ADS, as compared to a net income of $0.05 million, or $0.20 per ADS, for the comparable quarter last fiscal year.

Total cash and cash equivalents stood at approximately $51.4 million as of June 30, 2006.

That concludes our financial review for the quarter ended June 30, 2006. I would request to Ajit to recap our performance in line with [inaudible].

Ajit Balakrishnan

Thank you. Just a quick summary, our India Online ads and U.S. Publishing revenue grew 52% and 12% respectively for the quarter, driving us over our company revenues for the quarter ended June 30, 2006, with $5.78 million, an increase of 37% compared to the same quarter last year.

Overall gross margins during the increased to 78%. Our operating EBITDA rose to $950,000, and net income was $1.98 million, or $0.0682 per ADS.

To maintain our position as the leader in the Indian online advertising market, we are:

• progressively deploying improved and enhanced content-sensing technology with a view to improving transfer rates or better-matching ad content to user needs;
• We are building up a very extensive Internet channels to increase on advertising rates, targeting advertisers, the business to consumer, and small-to-medium businesses.;
• Increase the number of advertising categories to 149 and listings to over 130,000 on Rediff Classified; and
• Vertical search offerings for airfares, jobs, and a family of products and ringtones.

We made good progress during this quarter. As you can see, the possibility of the India Internet user base beyond the top 8 metropolitan cities, we have rolled out a national advertising campaign promoting the new and improved and re-engineered Rediffmail, using over 20 television channels across the country. This is advertising in select outdoor locations and other PR activities.

This was a summary of our operations in the first quarter ending June 30. I thank you and we look forward to your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the Q-and-A session.

(Operator Instructions)

Your next question comes from the line of George Mihalos of Gilford Securities.

George Mihalos - Gilford Securities

Good evening, gentlemen. Congratulations on the quarter. I was hoping you could perhaps provide us with a deeper breakdown of the India Online revenues. By that I mean breakdown advertising, mobile, and e-commerce?

Joy Basu

Total advertising revenues were $3.03 million. Fee-based revenues were $1.04 million. When you go to past quarters, for competitive reasons, we do not break down the fee-based revenues into components. [It is just the description in the line].

George Mihalos - Gilford Securities

Are you seeing at all an increase in mobile content revenue, or is the fact that there is a disproportionate payout to the Telco’s still an issue for the industry in general?

Ajit Balakrishnan

Regarding the mobile revenue, there has been no mobile [strength]. There has been no particular [strength] since we recorded our last call. The situation continues as before, which is that each of the major markets, like Bombay or Delhi have [stakes] in the mobile market. We are using value-added services as a revenue share. At this point in time, the revenue share is very unfavorable to external service providers such as ourselves, so there is really no change that situation.

Our own strategy, in light of the [inaudible] is to focus on those services which are proprietary to us, and this includes the [SMS] facility on instant messenger. It includes the [inaudible] facility, which operates independent of the operator, and it includes a search for ringtones, which we are waiting on. It is in the early stages.

We believe that the future for us lies in recreation and it will take a little while to show results, but I think we are making good progress, and we are [inaudible].

George Mihalos - Gilford Securities

Can you comment at all as to the contribution within your online advertising revenues of a pay-per-performance advertising versus the standard CPM-based pricing? Are you starting to see an increase and the performance-based?

Ajit Balakrishnan

There has been a slight shift in the conversion. I cannot remember. I think it is approximately two-thirds of the base at one point is performance-based, and that number shifted. I think it is still around, if you take the number -- it is around two-third/one-third. Those are sort of the statistics. It is very deliberate -- 67-33.

[Multiple speakers]

George Mihalos - Gilford Securities

In terms of CPM rates, have they been flat recently, and should we expect flat pricing over the near term?

Ajit Balakrishnan

I think you should expect flat pricing for some time. What the ads, the thing about it is a substantial growth in the user base, which we cannot put an exact number to it, but a feature of this quarter, the June quarter, is that both anecdotally and our own internal number, so that there is substantial activation of the user base in this last quarter. Secondly, that being true, page views increases, and you can detect that in [inaudible] for planning the potential.

[Multiple speakers]

Advertising rates are going to be flat.

George Mihalos - Gilford Securities

Thank you. Last question, if we look at your operating costs, it seems that they were relatively flat on a sequential basis. How should we view them going forward? Should we be looking for an increase a little bit in your marketing and development costs, as you promote a little more and roll out some new products? Or do you think you can sort of hold it roughly in this range here?

Ajit Balakrishnan

I think it is the same as last time, which is that during a growth phase of this market, and then there is intensified competitive activity with who is growing in India, and during that time, you can expect an increase -- how much of an increase, that is… but we believe that during the next few quarters, the right thing for our company, the right thing for our business is to invest in promotional activity to make sure that we are in front of our consumers during a high-growth period [inaudible].

George Mihalos - Gilford Securities

Okay. Thank you.

Operator

(Operator Instructions)

Your next question comes from the line of Sameet Sinha of Kaufman Brothers.

Sameet Sinha - Kaufman Brothers, L.P.

Good evening, gentlemen. Just a couple of quick questions. Can you shed some light on the competitive environment? Obviously Google is in the country now. Yahoo is also getting very active. What are some of the changes, both in the macro environment and the effect on your company that you are seeing?

Ajit Balakrishnan

You know, one good thing about the currency value is that there are three companies, [Adsense], Google, and Yahoo! going out and convincing both small and medium and large advertisers that there is a great deal of benefit to be had advertising on the Internet. You will recall [inaudible] last year, there was Yahoo! promoting the cost of online advertising with ad agencies. I think that job has more than done to a high degree of [inaudible] to all of us.

When they moved to large corporate advertisers, they should hit both Yahoo! and us on the Trade Association’s [inaudible].

Google is [inaudible], and I think today there is a great amount of effort being done by all three to go to small- and medium-sized [inaudible] who are not so used to starting to [inaudible].

So it makes the market [inaudible]. We have to make sure that our reach and our pricing remain very competitive for us to take advantage of our online. I think this is an integral part of the advertising.

The other element is we finally see that broadband expansion continues on a fast pace. There are several large, well-funded telecom companies, [Land], [BroadB], [BSNL] to name a few, who are progressively rolling out broadband in virtually over 100 cities in India. [inaudible] of broadband. You can buy broadband connections I think for $45. Next to 200 Rupees a month, it is very affordable.

So we are seeing cost of development, we are seeing a broadband user spending much more time on the net. So the research shows the time spent or the number of times you access the net [inaudible]. It is becoming almost [inaudible] in the metro cities. We think the [inaudible] implications for e-commerce development. The e-commerce sites, as you know, are the ones who are really driving this on the performance advertising.

All those signs are much more positive than [inaudible] than we recorded our last quarter call. Sameet, have I answered your question? Are there any other competitors you want me to…?

Sameet Sinha - Kaufman Brothers, L.P.

No, that should be good. Based on the broadband growth, can you talk about internally, what are you hearing from RTRAI? What are the efforts by DSNL? They missed the call last year for broadband growth. Anything else that you could help us understand?

Ajit Balakrishnan

I think what has happened in that nine months is there has been a wholesale conversion of Internet cafes to broadband connections. They are the ones who have taken up the broadband across the board. So as it comes now, about half of the users in India [inaudible] those cafes. There is a substantial portion of [users] to come in broadband enabled, so when you look at broadband numbers and you see they sold only 2 million connections and 1 million connections, that understates the reach of those [bands].

I [inaudible] opportunity to reach the Internet Cafes who have broadband connections. I think most of what is going on, I think the next research that will come out at the end of this period, you could expect to see growth in broadband.

Sameet Sinha - Kaufman Brothers, L.P.

Last question is, you obviously launched a new email platform. Do you have some initial data that you could share with us in terms of feedback or usage, just general adoption?

Ajit Balakrishnan

…look like, you can drag and drop things, and [inaudible] completion, when you try and type an address. You can view mail in the same page without refreshing to another page or site. Our [inaudible] strategies seems to recently have been we can relatively introduce it at the same time as Yahoo! and Microsoft, probably the same week. So I think we are learning [inaudible] on this one.

The initial up-tick of mail has been excellent due to a variety of factors. The new mail, excited about it plus the television campaign seems to be running. We are seeing an increase in the new user registration to about 50% of those around [11]. Approximately 50%, compared to around [inaudible], in the first two weeks, the second or third week of the whole campaign, so I think that is quite an [accomplishment] for us.

Sameet Sinha - Kaufman Brothers, L.P.

So this is just new user registration going up? Does it automatically upgrade the platform for the older users, or do they have to select to be upgraded to the new platform?

Ajit Balakrishnan

Actually, I will cut this into two parts. One is the question about how is the new service and the [inaudible] increasing the user base? We have seen about a 50% growth in the new user base.

We are opening in phases the same service to our current users and there has been quite a major shift from the old [to the] new item. You must remember that the consumers and services section as an online world generally dislike changing the U.I. They are cautious. For everyone, it is an experiment. Old users tend to be thrown by a new interface, so we are very gradually offering it to them, and offering them the option of both these interfaces during the change period. We will redeploy this so we can then [inaudible] to this user. We are very slowly introducing it to users so they do not get surprised. [inaudible] , so we are doing it very, very cautiously and the option is to the user. They can use it anytime they want.

Sameet Sinha - Kaufman Brothers, L.P.

Thank you very much.

Operator

(Operator Instructions)

At this time, there are no further questions. Mr. Balakrishnan, are there any closing remarks?

Ajit Balakrishnan

That is all. Thank you very much for your time and attention, and we will see you in the next call. Goodbye.

Operator

That brings us to the end of Rediff.com’s conference call for the first quarter ended June 30, 2006. Thank you for participating in this conference call.

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