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Executives

Mandar Narvekar – IR and Corporate Communications

Ajit Balakrishnan – Chairman and CEO

Swasti Bhowmick – CFO

Analysts

Nikhil Pahwa – MediaNama

Rediff.com India Limited (REDF) F3Q14 Earnings Call January 23, 2014 9:00 AM ET

Operator

Good day, ladies and gentlemen. I am Sourodip Sarkar, your moderator for this call. Thank you for standing by, and welcome to the Rediff.com Third Quarter Financial Year 2013 and 2014 Earnings Conference call. During the presentation, all participants’ line will be in listen-only mode and post that, we will open the floor for Q&A session.

So now, without further delay, I would like to hand over the proceedings to our first speaker Mr. Mandar Narvekar. Thank you, and over to you sir.

Mandar Narvekar

Thank you, Sourodip. Good morning, everyone, and thank you for being with us to discuss Rediff.com’s financial results for the third fiscal quarter ended December 31, 2013. I would like to introduce you to the members of the management present on this call who will take you through the highlights of the company’s performance.

We have with us Mr. Ajit Balakrishnan, Chairman and CEO; and Mr. Swasti Bhowmick, CFO. As mentioned earlier, all of you are currently on listen-in mode only. This conference call will last for about 20 minutes, and then we’ll be glad to answer any questions that you may have. For your immediate reference, we have also posted the earnings release for the third fiscal quarter ended December 31, 2013, dated today on our website at investor.rediff.com. You may also call me at our Indian office at +91 (226) 182-0000 and we’ll be glad to fax or email you a copy during the course of this call.

Before proceeding, I would like to mention that during the conference call, except for the historical information and the discussions contained herein, statements may constitute forward-looking statements for the purpose of the Safe Harbor Provisions under the US Private Security Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as may, will, expect, believe, will continue, anticipate, estimate, intend, plan, contemplate, seek to, future objectives, goal, project, should, will perceive or similar terms, variations of those terms or the negatives of those terms.

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 the forward- looking statements. These risks and uncertainties include, but are not limited to, slowdown in the economy worldwide and in the sectors in which our clients are based, a slowdown in internet and IT sectors worldwide, competition, the success or failures of our past or future acquisitions, attracting, recruiting and retaining highly skilled employees, technology, acceptance of new products or services, the development of broadband internet and 3G networks in India, legal and regulatory policies, managing risks associated with customer products and a widespread acceptance of the internet.

Listeners should carefully review the risk factors and any other cautionary statements contained in our latest Annual Report on Form 20-F and other reports filed by Rediff.com with the US Securities and Exchange Commission from time to time.

These reports are available on the SEC website from the SEC’s offices in Washington D.C. and on request by emailing us at investor@rediff.co.in. Rediff.com and its subsidiaries may from time to time make additional written and oral forward-looking statements. Rediff.com and its subsidiaries do not undertake to update any forward-looking statements that may be made from time to time by Rediff.com or on its behalf.

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

Ajit Balakrishnan

Thank you, Mandar, and good morning to all of you. Our CFO, Swasti Bhowmick will provide you more financial details, but I’d first like to start with a few comments about our quarterly results, before providing updates on our business, our market and what we expect for the future.

Let me begin by saying that our business is growing as we’ve not at the pace we had hoped that we are growing, and the initiatives we launched more than a year ago are all showing signs about improvement and upside in the quarters to come. For the most recently completed fiscal quarter, we reported total revenues of about $4.17 million, which represents a 5% increase in US dollar terms and 20% increase in Indian Rupee terms over last year’s comparable third quarter, with the increases driven from our India Online operations. We are encouraged by this growth despite all that we have faced in this challenging economic environment in India.

Additionally, our gross margins for the quarter were 39% compared with last year’s same period at 28%. Over the past few quarters, with strength in our Online marketplace, which includes the Online Shopping marketplace, Enterprise Email business and Online TV marketplace, has helped to offset some of the weakness we and others in our industry have felt due to the economic pressures in the advertising market in India particularly.

In our Online Advertising business, we are early to market with content marketing and native ads. Some of the clients in our Online Advertising business are Samsung, the Life Insurance Corporation of India, Amazon, MakeMyTrip, Edelweiss [ph] among others. This quarter we added 45 new clients, such as [indiscernible] Ingram Micro, HDFC Mutual Funds, Mahindra Holidays and so on. We are a resource to these local and global leaders and we are making an aggressive push to expand in this area.

For the quarter, our marketplace for Online Shopping grew 83% in revenue year-on-year in Rupee terms. Consistent with my remarks on last quarter’s conference call, we have placed an increased emphasis on improving the user experience expecting our offerings and increasing our reach throughout India. We are being patient and managing cash prudently, at the same time we had been opportunistic investing in resources we believe in areas where we have great potential for us.

In our online marketplace, the total number of merchants now stands at over 1,000 and we are adding more merchant accounts by the day. Last quarter for instance, we had a mere 800 accounts of merchants and we continue to expand. This quarter, we made a conscious effort to include a range of branded products on our Online Shopping marketplace. Our platform now showcases a good mix of branded and unbranded products across a wide range of categories, some of the better known brands which exists on the marketplace are [indiscernible] Converse, Flying Machine, Puma, Adidas, Haier [indiscernible] and Pepe jeans.

In this quarter, we added American Swan, Fast Track, 42 and Bombay Dyeing to business. We are considering to talk with other merchants large and small, as well as potential business partner and this is an area we intend to continue to invest in throughout the year. We are working to ensure quality of service by developing two key projects namely; mobile-based merchant center, which will make it easy for our merchant partners to manage the inventory and prices on the platform, and the customer delight center, which will enable users to keep track of their orders and delivery schedules. Both projects are in final stages and should rollout in the first two weeks of February.

In this quarter, we have put a special emphasis on improving the usability of our mobile site for online shopping by making an optimum use of key functionalities provided by smartphones. We are witnessing a fast uptake of our Online Shopping service on mobile with roughly 10% to 12% of our user base now visiting us on mobile. Differentiating Rediff from the competition through new services and providing and seamless user experience with full functionality, we believe is a key to things.

I would also add that we are imposing strong product margins, and like many of the players in India, we have maintained a positive margin of 14%, 10% in the past quarter and this in spite of – and maintained it in despite increased competitive pressures. Hence it’s important to note that we report – here, it is important to know that we report only the margin and not the gross market value of goods sold, which is the industry norm in India.

We have a strong offering in the Enterprise Class Email business and it continues to grow. And it’s been great pleasure that I announce that our service has been voted as Most Preferred Choice in the Enterprise Email Segment by top Indian CIOs and we received the 2014 CIO Choice Award for Enterprise E-Mail Solution. While a relatively small percentage of our revenue base today, we believe it’s an important element of our strategy as the more active users, we have the greater brand awareness we believe we will achieve.

We have in this business a strong portfolio of over 1,000 large corporate clients whose substitutes are [indiscernible] main platform. Some of the more better known ones are Fedders Lloyd, Bajaj, Dr. Reddy’s, PNB, MetLife, Sun Life insurance, HDFC Bank, Eureka Forbes and the Government of Maharashtra, Department of Sales Tax. In the last quarter alone, we added 160 new clients to our business.

Some of the new notable clients which were added in this last quarter was Mother Dairy, RPG Life Sciences, [indiscernible] and the Jasubhai Group. Apart from this secured and reliable Enterprise Class Email service which offers administrative control features, the main part of our service has been the availability of our service on almost all mobile operating platforms. Almost 15% to 20% of our email users now access service on mobile phones.

Our Online TV marketplace business is essentially a marketplace for TV advertising for local merchants and channels, which enables merchants to advertise on the SLT [ph] television channel in specific cities. This service is now fully deployed in large number of cities and now reaches over 10 million households in India.

Through the Online TV marketplace, a new initiative to grow business, a new initiative. We believe that overtime a diverse offering and reach will help differentiate Rediff and make us one of the chosen destination for business. I am pleased to report that during the third quarter, we increased revenues for this business about 1.6 times as compared to the same quarter last year.

I talked in the past about – in the past about making some of our computer-based offerings more applicable to the mobile market and we continue to drive this throughout our organization. With Rediffmail, our real-time news service and social media offerings, we are developing a number of user friendly applications. Our Online Shopping marketplace is an area we have focused on. In last August, we announced the launch of our free shopping app for Rediff Shopping, an app that’s let’s user in India check prices of books by simply scanning the barcode and making direct purchases from their mobile device.

While we started it with books, we will overtime grow this out into other categories such as apparel, accessory, banks, mobile phones and so on. Our goal is to provide current and targeted user with online shopping experience that is unmatched in our territory.

All of our apps are available on all the leading mobile operating platforms including iOS, Android, Blackberry, Windows, Java and Symbian. Another highlight for the quarter that I would like to cover is our initiative in providing advanced data journalism tools to our users to enable them to make informed reviews on social political events based on their own inferences drawn from data that will help the opinion of journalist.

An example of this aspect, it’s a new product, the Sentiment Meter. This is a new product we have been working on some time and quite proud of it. It’s a three-party Sentiment Meter that allows users to share their views and say the impact of public sentiment on an election outcome. It was created especially for the December – recent December 2013 Delhi elections and it’s a tool we believe will be widely used in future elections.

We use data journalism to publish insight from analysis on the political chatter in social media prior to the Delhi elections. The analysis based on re-tweets because re-tweets are seen as an endorsement, presented a visual network which pretty accurately forecasts what the final outcomes in Delhi were.

I’d like to make a few remarks on the industry now before taking the call – turning the call over to Swasti. The economic and political climate in India is well documented throughout the world, so I won’t rehash about that. I would however like to talk about the internet and broadband infrastructure and some recent initiatives by government in industry to drive growth in 2014 and beyond.

According to the recent report of comScore Media Metrix, the Indian market is growing at a pace of 16% year-on-year in unique visitor terms, and it’s now 82 million users. According to the same report, we are now tagged at about 16.5 million unique visitors, which is approximately a 20% reach in the Indian market. Additionally, as for the latest report by the Telecom Regulatory establishment, the total number of active wireless subscribers in India grew 6% over the year to reach 745 million, while broadband subscription grew 1% in the last year to reach 15 million at the end of October 2013.

Second, while the market is growing and our country’s infrastructure is being built, in my opinion and in the opinion of many industry and media reporters, we will see that adoption has been slower to materialize than initially thought. Part of that has been due to the state of the economy. In a recent interview, the Telecom Regulatory Authority Chairman talked about low speeds in the mobile phones and other devices and how broadband connection growth has been poor, I believe that there is now a renewed focus to make more spectrum or radio waves available to operators, so that they can deploy newer technologies for increasing broadband speeds.

As he noted, you have to build a core infrastructure and penetration of devices. After a few delays, the Department of Telecom is now set to formally auction several bands of spectrum is been added in this process.

Next, remember that with over 173 million internet users comprising mobile and the web, India is expected to become one of the major top three players in the world.

I would now turn the call over to Swasti Bhowmick, our CFO, who will provide you with details of our financial performance, and I will make a few closing remarks after that.

Swasti Bhowmick

Thank you Mr. Balakrishnan, and good morning to all. I’ll begin with our quarter results. Overall revenues for the quarter ended December 31, 2013 were $4.17 million, up 5% over the corresponding quarter last fiscal year. Within this, revenues from India Online were $3.42 million, an increase of 7% over the corresponding quarter last fiscal year.

Total India revenue includes Online Advertising revenues of $2.12 million, decreased by 3% and fee-based revenue of $1.30 million, increased by 28%.Revenues from our US Publishing business were $0.75 million as compared to $0.77 million for the quarter ended December 31, 2013, a decline of 3% year-over-year.

Gross Margins for the quarter ended December 31, 2013 were 39%, almost the same as in the corresponding quarter last fiscal year. As Mr. Balakrishnan noted, our gross margins are holding firm, despite continued competitive and economic pressures our industry is facing.

Operating expenses for the quarter ended December 31, 2013 were down 11% at $3.2 million, as compared to $3.52 million for the quarter last year. We are actively and aggressively looking to reduce our costs further and like with our margins, this is one of the top priorities.

Operating EBITDA showed a loss of $1.5 million for the quarter ended December 31, 2013, as compared to an Operating EBITDA loss of $2 million for the corresponding quarter last year. As you are aware, Operating EBITDA is a non-GAAP measure and we direct you to our press release dated today, which sets out a reconciliation of Operating EBITDA to net income.

Depreciation and amortization expenses were $0.68 million for the quarter ended December 31, 2013, as compared to $0.93 million for the corresponding quarter last year.

Interest income for the quarter ended December 31, 2013 decreased to $0.32 million from $0.51 million in the quarter ended December 31, 2012.

Net loss per ADS for the quarter was $0.069, as compared to net loss per ADS of $0.109 for the same quarter last fiscal year.

Our total cash and cash equivalents stood at $17.9 million or in Rupee terms 1,108 million as of December 31, 2013, as compared to $21.1 million or in Rupee terms 1,157 million as of December 31, 2012.

We believe our cash resources are sufficient to execute our strategy and our balance sheet provides us the flexibility to do so.

We continue to focus on cost control initiatives while strategically investing in our business. We are focused on maintaining our cash position to ensure that we have the resources needed to drive growth throughout our businesses as the market gains traction. We are focused on top-line growth and expanding our margins.

That concludes our review of the results for the quarter and year ended December 31, 2013. I would request Mr. Balakrishnan to sum up the call.

Ajit Balakrishnan

Thank you, Swasti. As noted above, our overall revenues for the 2013 third quarter increased 5% in US dollar terms and 20% in Indian Rupee terms, while EBITDA loss declined 25% and the net loss declined 37% compared to the same period last year. We are fully embracing the mold of our online users from PC to mobile and we now have strong mobile phone offerings for our Online Shopping marketplace and the Enterprise E-mail and for our news product.

We are also leading – on believing people in news organizations efforts in data journalism and you can see some examples of our work using Bayesian techniques on our homepage under the Rediff Labs link.

Again, I would like to thank you for your continued support. And at this time, we’d like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you so much sir. With this, we are going to start the Q&A interactive session. So I would request all the attendees and the participants, if you wish to ask any question, you may press zero and one on your telephone keypad and wait for your name to be announced. (Operator Instructions). We have the first question here from Mr. Nikhil Pahwa from MediaNama. The line is un-muted. You may go ahead and ask your question please. Mr. Nikhil, your line is un-muted. You may go ahead and ask your question.

Nikhil Pahwa – MediaNama

Thank you. Hi Ajit, I was just wondering about how you are doing on the DAVP advertising front, because one of the website that’s been empanelled by the Indian Government. It’s a long pilot, so I was curious about how it’s done so far?

Ajit Balakrishnan

I am sorry, Nikhil. What did you say? I can’t hear you, can you repeat?

Nikhil Pahwa – MediaNama

So the DAVP which is the Indian Government’s advertising agency has empanelled your site amongst others. I was wondering about whether that’s an emerging source of revenue for you, and how that’s doing.

Ajit Balakrishnan

It’s very minor. And so far I think government’s advertising, the DAVP, they didn’t add up very much. I don’t think it is even more than 1% or 2% of our revenue. Yes, it’s less than 1% or 2%. For us or for anybody else, it seems that DAVP is a big source during the French era, where I am not seeing them being very active today in the online area.

Nikhil Pahwa – MediaNama

Okay. Could you give us a sense of how – I mean what are you doing in terms of native advertising and how much is that in terms of revenues for you, because I don’t think there are many who have experimented the native in India yet?

Ajit Balakrishnan

We are still in good traction. Unfortunately I can’t break the exact numbers out to you, but it’s high single-digit percentage of our total, I can tell you that. And what is more important is that some of our key clients are the early movers are getting excellent results out of it. We ourselves used it for promoting some of our own services such as Online Shopping or Email and we are seeing excellent results as well.

I think – I don’t know, it might well be the – I think the native ads and content marketing initiatives may well be the – I think the savior of the display advertising world. So I am very optimistic about that.

Nikhil Pahwa – MediaNama

And I am sorry if I am repeating this, but I might have missed it earlier. How much should be done in terms of India Online Advertising revenues and how much is fee-based revenue for this quarter?

Ajit Balakrishnan

Swasti, what’s the number, what percentage? Give us a moment. I think advertising revenue is 62% and fee-based is 38%. So as you can see over the quarter, the fee-based portion is increasing and that’s – a lot of it is driven by our online marketplace which I again emphasize [indiscernible] the fees that we make, 12%, 13%, 14% in that fee on, yes. That is very much positive in our Online Advertising side.

Nikhil Pahwa – MediaNama

Okay. Just on Vubites. What sort of competitive pressure are you seeing, because two other players in that space SureWaves and Amagi have recently raised funding. I was wondering about how you are placed in comparison with them?

Ajit Balakrishnan

I think it’s a good idea as we have more competitors. I think really what happened in online shopping. We launched a shopping platform in 1998 if you recall. And by 2003, all was given up saying that, you know one company cannot lift who are industry of its own. And the action is that then a lot of VC [ph] funding came in, I think in 2010, it allowed some of our competitors sell product below cost. And but the good thing is that Indian consumers got very excited about it. And so we have been since then effortlessly gliding upwards making a strong positive margin.

I think something similar will happen to the local TV or targeted TV. TV industry in India needs it more than anyone else because as they are fortune of creating – they need to get better revenue. And I think that two extra competitors are welcome sign for us.

Nikhil Pahwa – MediaNama

Just curious about how many cities you are in now and how many merchants have advertised so far? You said data but sorry if I missed it this time?

Ajit Balakrishnan

We didn’t tell you, I think – we are now in seven cities, in seven metros. And I think the number of merchants on our site is I’ll tell you in a moment. In the order of magnitude – yes, and I just looked it up, okay. I think during the quarter, I think about 145 or in the order of magnitude, around 145.

Nikhil Pahwa – MediaNama

Okay. Also just curious about which companies are you currently invested in? You’ve sold stake in a few companies in the past, and what are the status of those investments?

Ajit Balakrishnan

I think Tachyon in Bangalore is one. I think we still have their investment. They are pioneers in language technology. I think they have a bright future ahead, but we don’t know when that future is going to go on for them, because language-based internet has not really caught fire as you know. I think they are a current investment and – Swasti, do we fully have…

And then we have an investment in an education site called Examville. I think they are also going through the early stages of evolution of online test preparation. I think they’re focused on that. And these are two external investments. We reflect both in our accounts that at zero value today, you must remember that. Both are at zero value.

Nikhil Pahwa – MediaNama

In the sense you have written off those investments?

Ajit Balakrishnan

Yes, we have embedded because I think these – both are long-term plays and we always are in a very conservative strategy on that.

Nikhil Pahwa – MediaNama

And how big stake do you have in those investments?

Ajit Balakrishnan

I can’t relate off-hand, some of them are convertibles, one is – both are convertible instruments, so it’s not easy to…

Nikhil Pahwa – MediaNama

If I remember Tachyon was 26%.

Ajit Balakrishnan

In the order of magnitude, it will be in fourth to a third [ph] but we don’t have right now currently what the conversion value will be.

Nikhil Pahwa – MediaNama

Okay, just one last question. I was curious about the state of Online Advertising at the moment. Last year was fairly choppy from what I understand. Are things improving now and are you benefiting from – for example political advertising leading up to the elections. What’s your sense on how 2014 is going to pan out for Online Advertising?

Ajit Balakrishnan

I think Online Advertising has seen its ups and downs in the last 18 months. The ups were mostly contributed in the last two years by venture capitalists of e-commerce products, that was big thing. And then I think some key advertising groups last year like people in the automotive sector, Maruti and others were active, and so were the mobile phone makers and mobile phone services companies. They were very active last year.

But as you know in this year, in late 2013 and early 2014, some sectors of the Indian economy are not doing that great. I think our companies are going through a harrowing time [indiscernible]. The mobile phone services I think some of them are leaking their bones [ph] and the mobile phone operators – Samsung is very active, but most of the others are slow. So it’s a mixed bag. I think on the other hand, the hearing reports publicly public media reports that people like Levi’s and P&G are talking a re-look at their whole overwhelming trend on TV and they are looking towards the internet, because today there is a reasonable number of users in India.

So I think it’s a mixed bag. It’s hard to tell. On the election front, I think we did not participate in the Delhi elections at all. The elections, finally it has clean over, what is it called, over the table well documented spends, we are welcomed to that, but I don’t know. It’s not going to be like the U.S. elections. We’re not going to – in the U.S. elections, there the major party would spend a billion dollars with media, I don’t think we are going to see anything like that. Little – tiny small bump most probably.

Nikhil Pahwa – MediaNama

I was curious about the video advertising piece, because we’re hearing about and we’re seeing a lot of ads on YouTube. How are things nicer in terms of video advertising for you?

Ajit Balakrishnan

We have let’s say, healthy sale of it. I think the three pod [ph] video advertising is the traditional advertiser feels comfortable with the media, because he has seen that before, moving images and so on. But I think we have some offering, but I think at the sale of the total ad market, online market, I don’t believe it is more than a single-digit percentage today.

Nikhil Pahwa – MediaNama

But are you seeing an increase in person, are you seeing that grow? YouTube is a substantive growth from what I have heard.

Ajit Balakrishnan

Yes. There is growth particularly if you have premium perpetually produced content. It has seen a growth. It is definitely seeing a growth. I think, no doubt I think.

Nikhil Pahwa – MediaNama

Are there any websites [ph] just for getting contents? Sorry, any chance for getting professional content on?

Ajit Balakrishnan

We have deals with a sizable number of professional content producers. You see all links on our site and we work on a profit-sharing basis with them. We do not take the risky – we had not taken the risky part of paying upfront or guaranteeing minimum since on, we don’t do that. So I think on a revenue share basis, we are working with several there.

Nikhil Pahwa – MediaNama

Good, Ajit. Thanks, and hope to see profits come back to the company soon. Thanks.

Ajit Balakrishnan

Thank you.

Operator

Thank you so much. (Operator Instructions) So at this time, there are no more questions. I would like to hand it over back to Mr. Narvekar, and all the panelists for any final or closing comments.

Mandar Narvekar

Thank you, Sourodip. Thank you everyone again for joining us on this call, and we wish you a very good day ahead. Thank you very much.

Operator

Thank you so much. Thank you, ladies and gentlemen for joining us. Hope you all have spent an useful time. With this, we conclude the Q3 FY13 and ‘14 earnings call. You may all disconnect now. Thank you so much.

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