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Rediff.com India Limited (REDF)

F3Q07 Earnings Call

January 23, 2007 8:30 am ET

Executives

Ajay Menon - IR and Corporate Affairs

Ajit Balakrishnan - Chairman and CEO

Joy Basu - CFO

Analysts

Sameet Sinha - Kaufman Brothers

Ashish Thadhani - Gilford Securities

Louis Corrigan - Kingsford Capital

Presentation

Operator

Good morning and welcome to the Rediff.com Conference Call declaring the Earnings Result for the Third Quarter ended December 31, 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 to your host for the conference, Mr. Ajay Menon.

Ajay Menon

Thank you, Laurie and good morning to you all and thank you for being with us to discuss Rediff.com's financials for the third quarter ended December 31, 2006. I would now like to introduce to you to the members of management present on this call, who will take you through the highlights of our company performance. We have with us Mr. Ajit Balakrishnan, Chairman and CEO and of 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 will be glad to take answers for questions that you may have.

For your immediate and ready reference, we have also posted the earnings release for the third quarter ended December 31, 2006 on our website at the URL http://investor@rediff.com. You may also call as at our office in India at 91-22-2444-9144, extension 202, and we 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, expect 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 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 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 the company's filing 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.

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Ajit Balakrishnan

Thank you, Ajay and good morning to all present. To begin with, I would like to share some highlights of the environment in which we operate. According to the Indian Central Statistical office, the Indian economy performed strongly during the second quarter of financial year 2006-07 with real GDP growth at 9.2% as against 8.4% in the same quarter last year. The Union Minister of Communication and Information Technology has declared 2007 as the "The Year of Broadband and PC Penetration". The Indian Department of Telecom has already announced broadband speed upgrades for subscribers of two of India's leading telecom service providers. These subscribers now have access speeds of 2 Mbps compared to 256 Kbps without any increase in charges. Broadband access charges in India at approximately $5 per month continued to be among the lowest in the world.

The Indian PC market according to IDC, International Data Corporation, an independent market research company grew 24% in terms of states volume during the quarter ended at September 2006 compared to the same quarter last year.

The Indian mobile subscriber base according to the Telecom Regulatory Authority of India grew to a $149 million at the end of December, which was 97% increase compared to the same date last year. Our own registered user base grew to 50.7 million users at the end of December 2006, a 23% increase compared to the same date last year. Our revenues totaled $7.75 million for the quarter ended December 31, 2006, an increase of 54% compared to the same quarter last year with India Online's revenues increasing by 80% to $5.69 million and US Publishing revenues increasing by 11% to $2.06 million.

Gross margins during the quarter ended December 31, 2006 increased to 82% compared to 75% for the same quarter in the last year.

Operating EBITDA for the quarter was $1.82 million a growth of 90% compared to the $0.96 million for the same quarter last year. Net income for the quarter was $1.51 million or 5.20 cents per ADS compared to 0.32 million or 1.23 cents per ADS for the same quarter last year.

Our strategic thrust continues to be product innovation with the overarching goal of being the portal most [celebrant] Indian users and using the latest technology. In executing this strategy, we have done a number of things during the fast quarter. We launched Moneywise, a finance channel for India's growing retail investor base. This channel enables users to search for data on stock and mutual fund prices. Additionally, users can create portfolios, attract performance online.

Our flagship email service Rediffmail extended accessibility with the introduction of an 'Access Mails Anywhere' feature. This enables mobile phone users to configure the Rediffmail account access their inbox and respond to mails from the mobile phone. Our news and information offering was extended with the introduction social tools under the brand Q&A. These tools allow users to post further questions that they may have based on our editorial features as well as allow others users to post the replies to these questions. This new service also seeks an introduction of [Tags] as a navigational feature on our site.

Our Image Search facility was extended with a Share Images feature. Our Fare Search, our air ticket search tool was extended to include detailed search facility that allows users now to search for hotel accommodation, across 250 Indian cities. Our Instant Messaging clients Rediff Bol, was expanded with a version that work on mobiles having the Symbian Operating System.

The listings on our classified advertising product which is aimed at small advertises, crossed the half million mark the number of listings crossed the half million mark during the quarter ended December 31. This was a 150% growth over the sequential quarter September 30, 2006. Our performance-based advertising offering continues to makes progress and in this quarter accounted for 45% for online ad revenue, as this compares to 31% for the same quarter last year.

We believe that in the Indian Information Technology space, there is a period of tremendous growth with many factors involved in creating new technologies. We have created a program to selectively make investments in promising start-ups, so that we encourage them to develop technologies which we can also benefit from. The first such investment is the minority stake in a company called Tachyon Technologies in Bangalore this quarter. Tachyon has developed a predictive text input technology which makes it easier to type in Indian languages on a computer keyboard. This technology is now being progressively deployed on our Instant messenger and email platforms.

I now request Joy Basu our CFO to take you through our financial performance for the quarter ended December 31, 2006, but before he starts let me tell you that Joy has been named a winner in the sixth annual India's CFO awards 2006, the list of winners include the CFO's of the TATA Consultancy Services which is India’s largest software services company, IBM India and ICICI Bank from this list of winners you can judge how prestigious this award is. I am sure that you will all join me in congratulating Joy on this achievement. Joy.

Joy Basu

Thank you, Ajit for your kind words, and good morning to all of you. Overall revenues for the quarter ended December 31, 2006 were $7.75 million, an increase of 54% over the corresponding quarter last fiscal year. During this period revenues from India Online stood at $5.69 million or an increase of 80% over the corresponding quarter last fiscal year. Within India Online revenues from online advertising increased to $4.52 million or 103% over the prior year quarter. Revenues from our US publishing business segment were $2.06 million for the quarter, an increase of 11% over the same period last year. Gross margins during the quarter ended December 31, 2006 improved to 82% compared to 75% for the same quarter last fiscal year specifically India Online recorded gross margins of 89% as compared to 88% for the same quarter last year.

Operating expenses during the quarter increased by 61% to 4.52 million compared to 2.80 million for the same quarter last fiscal year, primarily due to higher product development, advertising and stock-based compensation costs.

Operating EBITDA increased by 90% to $1.82 million for the quarter ended December 31, 2006 as compared to an operating EBITDA of $0.96 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 expenses increased to $0.76 million for the quarter compared to $0.35 million for the same quarter last fiscal year. A majority of the company's cash balances are held in fixed deposits with banks. These deposits contributed to an interest income of $0.94 million for the quarter as compared to $0.38 million during the same quarter a year ago. There was a Foreign Exchange loss of $0.49 million during the current quarter arising from the accounting for -- of balances held in U.S. dollars in the company's functional currency, the Indian rupee, due to strengthening of the rupee against the dollar.

Net income for the quarter ended December 31, 2006 was $1.51 million as compared to a net income of $0.32 million for the comparable quarter of last fiscal year. Net income per ADS for the quarter ended December 31, 2006 was $0.0520 as compared to a net income per ADS of $0.0123 for the comparable quarter last fiscal year. Total cash and cash equivalents split approximately $53.18 million as of December 31, 2006. This concludes our review for the quarter, I would now request Ajit to sum up the call.

Ajit Balakrishnan

Thank you Joy, and here is the summary. To maintain a leadership position in the Indian online space, we undertook the following initiatives. We launched several new products that addressed user needs. These include the Moneywise finance channel, the research facility for data on stocks for mutual funds. We integrated a social media platform Q&A for users to post and answer questions. There has been a popping of editorial content channel, we made our email service Rediffmail accessible to a large base of Indian mobile subscribers, users can now configure Rediffmail accounts to access their inbox and respond to mails from the mobile phone. We extend a search and advertising options in many different ways, Fare Search, which has only air tickets to search and compare functions, now includes hotels across 250 Indian cities. Our Image Search tool is now enabled for sharing images. Our classified segment's has crossed the half million listings mark. Performance based advertising now accounts of 45% for online ads revenue compare to 31% last year same quarter. All these efforts contributed to our results this quarter. India online advertising and U.S. publishing revenues, which grew 80% and 11% respectively drew the overall company revenue for the quarter to $7.75 million and increased by 54% compared to the quarter ended December 31, 2005. Overall gross margins during the quarter increased 82%, operating EBITDA rose 90% to 1.82 million and net income rose 370% to 1.51 million or $0.052 per ADS. That is our summary of our operations for third fiscal quarter ended December 31, 2006. Thank you.

Question-and-Answer Session

Operator

Thank you Mr. Balakrishnan we will now begin the Q&A Session. (Operator Instructions) Your first question comes from the line of Sameet Sinha of Kaufman.

Sameet Sinha - Kaufman Brothers

Good morning gentlemen. I had a quick question, you spoke about performance based advertising gaining share in the market. Could you clarify what that exactly is in the Indian context and could you give us some more color on it?

Ajit Balakrishnan

Yeah, this is essentially composed of two parts, one is when buyers, advertisers, negotiate with that and pays on a per click basis for results that they get and as to opposed to CPM, so this is one part and this could be even through search or it could be through content pages or on mail. But essentially you're paid for performance on a per click basis.

Sameet Sinha - Kaufman Brothers

So you're saying that that is getting traction?

Ajit Balakrishnan

Yeah, that’s training -- that is driving growth in the domestic market.

Sameet Sinha - Kaufman Brothers

Okay. And so CPM deals are not being signed for mostly it is performance based. Secondly in --

Ajit Balakrishnan

CPM could -- for me the CPM deal as well the net component is growing as well but I think performance based advertising is really the runaway success, yeah.

Sameet Sinha - Kaufman Brothers

Sure. And while we are on that topic, can you talk about what trends you saw in terms of CPM growth this quarter year-over-year and quarter-over-quarter?

Ajit Balakrishnan

The average CPM -- weighted average CPM remains about the same this year over the last quarter and this year over last year. Volume growth has driven much of the increase.

Sameet Sinha - Kaufman Brothers

Last quarter, you had mentioned that CPM had actually been up, so, it seems like there is significant variability quarter-over-quarter, is that what you are seeing in the market?

Ajit Balakrishnan

Well, just to put it -- it's about the same. It is not substantially different. Last quarter had a slight upward peak and this quarter is around the same. So, we are not seeing a consistent growth, but volume growth has taken -- I think that’s been driving total revenue growth.

Sameet Sinha - Kaufman Brothers

Does this provide you an opportunity where you could close CPM, since there seems to be huge demand or is that a reason why CPMs cannot go up any further?

Ajit Balakrishnan

I think it’s a -- I would look at it conversely. I think the growth is being driven by performance-based advertising and that really means that it is based on the content-sensing technologies that we are deploying step-by-step, which will allow us to get a better yield from the inventory that we have. So it will indirectly drive up CPM. The customers pay you for clicks and if you have used lesser pages to deliver that. So that’s completely within our control. So it is -- an effective CPM will rise the moment we mark the content-sensing better than what we have done today.

Sameet Sinha - Kaufman Brothers

Okay, thank you very much.

Operator

Your next question comes from the line of Ashish Thadhani of Gilford Securities.

Ashish Thadhani - Gilford Securities

Yes, good evening. My question has to do with operating leverage. The company has now been profitable for six quarters, what does management consider to be an achievable operating margin objectives, let’s say the $50 million revenue level, or during the next couple of years? And then I have couple of follow-up questions.

Ajit Balakrishnan

I think I can give you an answer on that. I would only say that, we -- as you can see the gross margins consistently maintaining and slightly improving and you can see that the EBITDA levels are improving. I would not like to make a forecast as we do not give guidance. But I can see that the trend -- we have reached a level where scalability is relatively easier this quarter than it was the same quarter last year. But I do not want to make a forecast on that yet. The competitive situation is emerging and it is entirely possible that, who knows one year from now it may intensify and we may need to spend more. But right now I think we feel that we are comfortable with this level and time will tell whether we can improve this substantially.

Ashish Thadhani - Gilford Securities

But aside from competition, you don’t anticipate a major step function of investment, right, that might detract from this kind of steady expansion that you referred to?

Ajit Balakrishnan

Well, if you look at this last quarter, what do we learn from it? Maybe you could draw some conclusions about the future fund there. One is that, it is really improvement and hard work and using brain power improves the click-through rate percentages, which is just going to be one source of growth, definitely. The second source of growth is to innovate in products such as our search product, the vertical search product, which inherently delivers far better click-through rates compared to its content pages. That's the second driver of the growth. And the third and big driver of growth is technology such as behavioral targeting, where you understand a user or a group of users and what they like to see and click on and by presenting themselves in real time, presenting with real time ads in front of them. So growth is going to come out all of these things. So it will -- time will tell.

Ashish Thadhani - Gilford Securities

Okay.

Ajit Balakrishnan

Most of these factors are limited by our own ability to innovate and our own ability to deploy scalable things, if the scale is coming to be an issue in India now.

Ashish Thadhani - Gilford Securities

And then focusing on the core India Online advertising business, in broad terms what are you measuring the addressable market at in dollar terms and roughly what rate do you believe that this market is growing, just so that we can benchmark your relative performance to that?

Ajit Balakrishnan

We are on route, as Joy pointed out, it's approximately 100% year-on-year on that ads side. We believe that we are currently there in the markets. I don't know whether we the leader, possibly we are best two. But I think we are growing ahead of the market without a doubt. How much ahead of the market, it's tough to say because organized figures are not available. So if we are growing at a 100%, the market is probably growing a little less than that. So there's something we can draw as this one conclusion. The second piece is that we no longer have to go out and do any missionary selling. If you recall two, three years ago, Yahoo! and us and MSN and others formed an association and we had to do a lot of missionary [facilitization] . We don't need to do that anymore. People are convinced. And there is such an incredible boom going on in India in most sectors and all of whom find it beneficially to do advertising online. I think the consumer loan sector, which leads -- the job sector which leads, I think the dating pieces. I think cog and you see everyone is providing scambuster results and the demographic that we offer on online which is a 20- to 35-year-old Indians is – in its absolute term irresistible value proposition for these advertises and we’ve done very well in the top eight metros between India is called socioeconomic classification A and A+. I think online advertising is generally better in India better than any other medium, television or print by far. So all the indications are that online advertising will continue to exhibit the same growth that we had seen in the past, but time will tell.

Ashish Thadhani - Gilford Securities

And you mentioned, Ajit, that you know numbers are little hard to come by reliable numbers, but based on your own planning and things like that this addressable market India Online advertising in broad terms would be what?

Ajit Balakrishnan

I don’t know there is anecdotal evidence that we are probably a figure between and 25% and 35% of the market and this is purely anecdotal, so you can project somewhere as to what the market size is.

Ashish Thadhani - Gilford Securities

Okay, well, that’s helpful. And Joy, the stock-based compensation picked up a little bit, where can we expect that to stabilize in coming quarters?

Joy Basu

We will have to continue to give the stock-based compensation to our employees. We believe it’s a very valuable tool to retain the best of the brightest and well as I said that you know since we don’t give forward-looking statements, I can’t tell you a dollar figure, but you can see in this quarter it’s gone up a little bit.

Ashish Thadhani - Gilford Securities

Okay. And then finally you are no doubt aware of the elevated takeover speculation in recent months, perhaps you can take this opportunity to air your views on the subject?

Joy Basu

I'm sorry, what?

Ashish Thadhani - Gilford Securities

There has been elevated takeover speculation in recent months. Do you have anything to add to that or to air your views on that subject?

Joy Basu

Did you say elevated takeover speculations involving us?

Ashish Thadhani - Gilford Securities

And involving Rediff. Yes.

Joy Basu

It's obviously where we kept secrets in America. We haven’t had this myself. Now, there is absolutely no interest, absolutely no interest. I mean looking from outside, it might appear that if you are a bunch of entrepreneurs who have get rich quick schemes, they like that, maybe it’s a good way to do with it no doubt. So there are absolutely no truths to that speculation. I really don’t know whether there are expectations to stop that, but I haven’t heard it.

Ashish Thadhani - Gilford Securities

Well, it’s a fairly elevated chatter here, but we can talk about that some other time. Nice quarter and good luck.

Ajit Balakrishnan

Thank you.

Joy Basu

Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Louis Corrigan of Kingsford Capital.

Louis Corrigan - Kingsford Capital

Hi, could you talk a little bit about the expanded advertiser base. It looks like that again you are getting an increasing amount of your revenue from the top 10 advertisers, it was 62% versus 57% in the September quarter and at the same time it appears that your number of advertisers website have appeared to have factor they were growing at a 20% year-over-year number a year ago and now they are growing at a 7% year-over-year number, it was 163 this quarter versus 160 in September versus 165 in June. So are we to from on – should we expect to see most of your growth being driven by the top 10 advertisers, do you expect to grow the advertiser base significantly from here or not?

Joy Basu

Okay, in our – as we count the number of advertisers is probably a misleading content, part of this is because much of the advertising and the Indian market online advertising still driven by a few large corporate entity for a few hundred of them. These happened to also be the big offline advertisers. Now that part of our advertising revenue which comes from small retail is much of it is today free that classified services is mostly free and there are half million listing and we are growing that base to make sure that people get experience, a good result out of it. So example, the half a million classified advertisers that we have today are mostly 99% of them are free and some day we hope that once they get convince of the result, they will start paying. So, the number that you counting today is mostly corporate, that’s why the number looks so small.

Louis Corrigan - Kingsford Capital

Okay. And did I hear you say that you believe that Rediff is just about 30% of the online ad market at the moment?

Joy Basu

Yeah, as I said it’s an anecdotal number that is all organized way to mention that, it’s somewhere in that region.

Louis Corrigan - Kingsford Capital

Okay. And can you talk a little bit about what’s going on in the competitive environment and what's looks (inaudible).

Ajit Balakrishnan

As you probably know, our two main competitors here are Yahoo! and Google. They both compete for the advertising revenue for us with us. We believe that it's going to be our ahead. As again based on anecdotal evidence that we are ahead of them in revenue. I think they are strong competitors. One would not wish to have any stronger competitor than those two, as you know. Yahoo! has been in India from many years, at least 10 years. Google has been strong presence over the last three years or four years. So, I think we compete across the board within for advertising revenue. We do not have any real competitor attempting to take a share of the ad revenue from us in this market, be international or Indian. So, I think this is really where the issue lies.

Louis Corrigan - Kingsford Capital

Okay. Can you talk a little bit may be about whether or not you think that you are holding share against Google and Yahoo! or whether or not you feel like you may be losing share because the Media Metrix number that come out, which obviously have some problems with them, but they appeared to show that Google and Yahoo! have current -- incrementally been taking share from you?

Ajit Balakrishnan

Well, the cost of Media Metrix numbers, first of all, all of the samples of metros and they have had some issues there. It carry all the samples of four week -- three weeks at least in India, which today accounts to may be about 35% or 40% of the market, and probably under-samples the rest and certainly under-samples the Internet cafes, which accounts for about 50% of all access in India. So, we believe we are holding our own and again the -- we have to check out the specific breakdown to this -- not Yahoo! as a totality, but Yahoo! in India and what Indian users do. So, I -- we think we are kind of reasonably holding our own, and the battle is still in its early days, as you know. I think there is a comScore Media Metrix reports about 25 million users, and if this is the start of the internet games. So, I’ll say that these are early days, and it’s too early to declare anybody as winners, us, Google, or Yahoo!

Louis Corrigan - Kingsford Capital

Okay, thanks very much.

Operator

(Operator Instructions) That brings us to the end of Rediff.com’s conference call for the third quarter ended December 31, 2006. Thank you for participating in this conference call.

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