Rediff.com F4Q07 (Qtr End 03/31/07) Earnings Call Transcript

May.16.07 | About: Rediff.com India (REDF)
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Rediff.com India Limited (NASDAQ:REDF)

F4Q07 Earnings Call

May 16, 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

Unidentified Analyst

Presentation

Operator

Welcome to the Rediff.com fourth fiscal quarter earnings call. At this time, all participants are in a listen only mode. After the speakers’ presentation, there will be a question and answer session. If you wish to ask a question at that time, press Star. I will now turn the call over to Ajay Menon, head of Rediff.com’s IR and Corporate Affairs.

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Ajay Menon

Thank you, and good morning to you all and thank you for being with us to discuss Rediff.com's financials for the fourth quarter ended March 31, 2007. 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 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.

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.

Ajit Balakrishnan

Thank you Ajay, and good morning to all present. I’ll keep my comments very brief.

To begin with, I’d like to jump right into our current products and I’ll update you on their current status. Job search now offers more than 100,000 jobs and covers all major job categories. Ringtone search now has over 60,000 ringtones to search and download from, book search has now over 1 million books to choose from, and Newshound has now been integrated with our websites.

I now request Joy Basu, our CFO, to take you through our financial performance.

Joy Basu

Thank you Ajit, and a very good morning to all of you.

Overall revenues for the quarter ended March 31st 2007 were $8.48 million, an increase of 66% over the corresponding quarter last fiscal year. During this period, revenues from India Online stood at $6.3 million, an increase of 76% over the corresponding quarter last fiscal year.

Revenues from our US publishing business were $2.18 million for the quarter, an increase of 42% over the same quarter from last fiscal year. Gross margins during the quarter improved 23%, as compared to 76% for the same quarter of last fiscal year.

Operating expenses increased by 59% to $5.04 million for the quarter, compared to $3.17 million for the same quarter last fiscal year. This is primarily due to higher product development, advertising, marketing, and stock based compensation costs.

Operating EBITDA increased to $2.10 million for the quarter, as compared to an operating EBITDA of $0.71 million for the corresponding quarter of last year. As you are aware, operating EBITDA is a non-GAAP measure. As issued in our press release today, we set up a reconciliation of operating EBITDA to net income. Depreciation expenses increased to $0.94 million for the quarter, compared to $0.48 million for the same quarter last fiscal year.

A majority of the company’s cash balances are held in ditch deposits with banks. These deposits contribute to an increase in interest income to $1.30 million during the fiscal quarter, as compared to $0.62 million during the same quarter last year.

There was a foreign exchange loss of $0.09 million during the quarter, arriving from the conversion of cash deposits and other balances in US dollars into the company’s functional currency, being in Rupee, and this was due to the strengthening of Indian Rupee against the US dollar.

Net income for the quarter-ended March 31st 2007 was $2 million, as compared to a net income of $0.52 million for the comparable quarter last fiscal year. Net income per ADS for the quarter was $6.89, as compared to a net income per ADS of $1.96 for the comparable quarter of last fiscal year.

For the fiscal year ended of March 31st 2007, total revenues increased by 53% to reach $28.68 million dollars. This is primarily driven by increased revenues of $20.76 million from our India Online business, while revenues from our US publishing business were at $7.92 million. For full fiscal year ended March 31st 2007, gross margins improved to 81%, as compared to 73%, as recorded in the previous fiscal year.

Overall operating expenses for the full year were $17.3 million, as compared to $11.26 million in the previous year. Net income for the full fiscal year ended March 31st 2007 was $6.99 million, (inaudible) $0.40 per ADS, at the EBITDA net income of $1.21 million or $0.45 per ADS for the previous fiscal year.

So we see cash and cash equivalents of approximately $53.55 million 2007.

This concludes our financial review for quarter and full fiscal year. And I will now request Ajit to recapitulate our performance before we end the call.

Ajit Balakrishnan

Thank you Joy. Here’s a quick summary. Regarding our position in the new online space we have taken the following initiatives. First, we continue our innovation led strategy and major features were added during the quarter, including search offerings for products, and the product comparison tool, as well as job search and ringtone search offerings. So those are the search offerings that are now available on the Mumbai phone deck of Indian operators.

We extended an (inaudible) platform that more features and occurs more parts of a service. We believe that this is an important part of our strategy and so far as it creates a network effect for our content. We have made many of our services ready for (inaudible). We’re offering application program interfaces and a web service front for them. We’ve offered unlimited storage space to our real pay users to satisfy the increasing needs of these efforts contributed to our research this quarter.

And to summarize, that regards India Online revenues and US publishing revenues, which grew 76% and 42% respectively drove up our company revenues for the quarter to $8.48 million, an increase of 66% compared to the same quarter of the previous year. While our gross margins during the quarter increased to 83%, updating EBITDA gross 183% of $2.01 million, and net income gross to $2 million or $6.89 per ADS.

Overall revenues for the full year were $28.68 million, an increase of 53% over the previous fiscal year. Operating EBITDA for the full year was $5.93 million, which represents an increase of 147% over the previous fiscal year. This was a summary of our operations for the fourth quarter and fiscal year ended March 31st, 2007. Thank you very much.

Question-and-Answer Session

Operator

Thank you Mr. Balakrishnan. We will now being the Q&A session. If you would like to ask a question, participants from India and the US, please press the Star key followed by the one on your telephone. If you wish to cancel this request, please press the pound or hash key. If you are using loudspeaker equipment, please lift your handset before making your selection. Your questions will be pulled in the order they are received.

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

Sameet Sinha - Kaufman Brothers

Good morning, a couple questions. In terms of the advertising formats that currently very popular in India, do you continue to see banner advertising as a dominant format? And any progress on any other formats if you can talk to sort of what you think would be big, whether it’s contextual or behavioral search? Anything?

Ajit Balakrishnan

OK, the first one, the banner versus performance based is exactly half and half approximately, OK? Apart from that, I think there the growth in the market is being driven by performance based advertising. It’s related in the formal text based ads or (inaudible) ads, both exist, but both are being paid for based on performance.

Most of the performance still is click-based, but there is a counteraction increasing trend towards results based in forms that are completed or lead to other things. That’s a smart beginning trend that there’s some clarity that that trend is going to increase. So where search based advertising is concerned, clearly in the domestic market, our impression is that it is relatively small still, largely because the number of e-commerce…they still remain miniscule.

So, the result is that there aren’t that many buyers or clicks from that sector, the e-commerce sector. The largest number of click buyers tends to be from the job sites, the matrimonial sites, and increasingly, the travel portals. Four or five of them have started. It’s a starting trend, and we have some strong offerings within that.

We drive a significant sentence of our revenue from that kind of advertising, with search based. I think the travel search that we have is one of the leaders in that category. So really we have a job search, these two are favorites, and are starting to pick up quite well.

Does that answer your question Sameet?

Sameet Sinha - Kaufman Brothers

Sure definitely. Secondly, in terms of, just one question to Joy, in terms of your definition of operating EBITDA, does not include stock compensation expense, correct?

Joy Basu

Operating EBITDA is our operating stock, a big proposition cost. So if you want to accent back and get back to a sort of a kind of cash EBITDA, you could do so. Proposition costs are $40,000 for the quarter and we have not (inaudible) for the operating expense.

Sameet Sinha - Kaufman Brothers

OK. In terms of, you've been adding significant number of tools and services to your site for the last few quarters. This has obviously attracted some traffic.

Can you talk about the increases in unique visitors, page viewers, and time spent? I understand that (inaudible) is difficult come by, but if you can start with what your internal logs are saying.

Joy Basu

We have not yet disclosed that deal, that means we are kind of working with COMPSCOR metrics to put some sanity to those kind of figures. So I'm afraid right now we have not yet disclosed that kind of data as of yet.

We will try our best to see whether by next time around, when it comes to talking, are ready to report accurately to us

Sameet Sinha - Kaufman Brothers

OK, last question. In terms of gross margin expansion, obviously we're seeing significant expansion there. When do you think this could level out, what's the optimists for a margin level for gross margins?

Joy Basu

It's again hard to tell, because of price exchanges increasing rates of advertising, and then advertising.

It is in seeing gross margin increasing per say, as the mix of (inaudible) to rest is increasing, that is taking the gross margin percentage. But it is hard to tell.

Sameet Sinha - Kaufman Brothers

OK, thank you very much.

Operator

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

Ashish Thadhani - Gilford Securities

Good evening, congratulations on a very nice quarter.

I have a couple of questions. I think two quarters ago you had indicated a step up in CISO's and marketing as a percentage of revenue, which hasn't quite played out to the extent that you might have indicated.

It would be helpful if you could provide some color on this, the outlook on sales and marketing spent.

Joy Basu

Ashish, I think we have kind of maintained around the same level. The reason being that I think, you well know, in site, in the web total business, advertising in offline media helps but to a very limited extent. The massive growth is driven by wireless services. As you know, we're not seeing any, if you're looking to model as any dramatic changes in that number.

Ashish Thadhani - Gilford Securities

So, in the same level as what we saw in this quarter, right?

Joy Basu

As you know, we don't give you guidance for the future, but I think to give you comfort I can say that it's in the same level. It won't go down on that.

Ashish Thadhani - Gilford Securities

Alright, that's certainly very helpful. And then moving on, could you discuss the impact of potential (inaudible) taxation and perhaps also recent re-appreciation on future results, how that might play out?

Joy Basu

OK, I'll answer the second part first and maybe Ajay will take the first part.

The second part is it's a small proportion of our revenue which is denominated in dollars. The proportion is not seen as reported as US offline, the US publishing media, it's about $2 million out of a 25%, which is relatively insignificant. As a matter of fact, it's a decreasing proportion as you go down.

If you remember a few years ago, the majority of our revenue today is a small portion, and I tend to believe that it's a decreasing percentage that we're talking. So, it's not making a major impact on us, on our debt currently, like IT service companies who are struggling with that.

As a study of the ESSOP issues something to do with it reaching the Indian government by (inaudible). Is that the question?

Ashish Thadhani - Gilford Securities

Absolutely.

Joy Basu

OK, I don't know whether Ajay's completed the study. Ajay, do you have, can you answer that?

Ajay Menon

Yes, (inaudible) acknowledge any tax on companies on just of options exercised by employees.

Back to maybe on the company, the company has the option of holding the tax from the employees. But we have made a decision of recovering the tax from the employees.

Ashish Thadhani - Gilford Securities

Correct.

Ajay Menon

Now precisely, we are studying still the accounting and whatever, fully positions of tax, so we can't really do it on that front. But I'm going to show you that whatever tax (inaudible), will be recovered from the employees.

Ashish Thadhani - Gilford Securities

OK, so the decision is sort of to go up basically.

Ajay Menon

Yes, that's right. As long as, Ashish, what happens basically is the employee fends and makes a profit on it, ours sort of profit that brings the tax (inaudible) loss, which isn't quite fair, you know, so the company doesn't come into that picture. Correct?

Ashish Thadhani - Gilford Securities

And then finally, I'd be interested in your thoughts in the practice providing quarterly and annual guidance similar to other NASDAQ listed Indian companies.

What are your thoughts on initiating our (inaudible)?

Joy Basu

Again ,we are firm followers of the doctrine adopted among US companies that (inaudible) guidance and guidance games are not a good thing to do. So we follow the best school of thought, more than the school of thought in India to give guidance.

I must point out to you that recently the security's board chairman in India had a public meeting and I happened to be sitting in the audience. I voiced views that Indian companies must now stop providing guidance in the market, because the moment he expresses his personal view, but you can rest assure that that's the thinking among the Indian stock markets as well.

So, I don't know. We are founders of the earlier doctrine as well not to provide guidance and let the past performance speak for itself.

Operator

Your next question comes from the line of (inaudible).

Unidentified Analyst

I have a question that is an important part of your strategy. So I'd like to know what you are planning to do and also on what you mentioned about a web service site for life. What service would that be?

Joy Basu

OK, thanks. Firstly, let me say welcome, congratulations for coming the first time to our call. I hope you come often.

Unidentified Analyst

Thank you.

Joy Basu

As far as mobile is concerned, if we have a descending view. We view mobile as another device to access any of our services.

Just another device, PC is one device, mobile is another. Hopefully, in the future there will be others as well. So we don't predict or distinguish between the mobile and the PC, in terms of the services we offer.

Our goal, it continues to be to offer practically everything that we do on the PC base business, through mobile in the new phone factor, and obviously simplifying it and licensing it with due respect the fact that the bandwidth is much lower.

But unfortunately, we don't have a particularly different strategy, and right now in the end year business, it's called mobile (inaudible) access is to download ring tones.

We mentioned earlier on, in regards, we mentioned that we now have one of the largest selections, a pretty large collection of ring tones, 60,000 ring tones and our strategy there is at very large to make things in terms of ourselves, to work cooperatively with our partners who placed on the side where we can host it and tag it. So that we have our site engines which are most centrally located, so that search engine is quite popular in India.

We tend to believe that it is probably, I hate to say, the most popular website, certainly among the top few people think of if they want to locate ring tones.

Essentially, think of mobile offerings as just the same thing we do extra, mail, news, mobile, ring tones and so on, and increasingly we are making it available to all kinds of phone factors on mobile and all kinds of speeds on sms space, as well as GPR space, so we don't see mobile as a distant part of us.

Does that answer it?

Unidentified Analyst

You mentioned the lines (inaudible)?

Joy Basu

Excuse me. No,I did not mention them, but I think we have, we work them, as well as we work with any of the others. That's nothing special.

They're a great company to work with and they have a great footprint, so we work them as much as we work with anybody else.

Unidentified Analyst

Right, and are your services available to (inaudible)

Joy Basu

Absolutely, every different operators, including the lines.

Unidentified Analyst

OK. Thank you for the interview

Operator

Again, if you would like to ask a question, participants from India and U., please press the Star key followed by One on your telephone.

Your next question comes from the line of (inaudible).

Unidentified Analyst

Hi guys, good evening, a great quarter. Few questions. The first one, could you break out U.S. publishing online versus offline revenue.

Joy Basu

Yes, we can do that. During the year’s formation of $2.18 million for the quarter, a great part of that is off-line with $1.4 million and online is $0.79 million.

Unidentified Analyst

OK. And then on Indian advertising on the same breakdown, in the release you said online advertising in India grew 92% year over year. Would that mean that the advertising sub segment with the India online advertising is about $5 million and the rest is e-based?

Joy Basu

Yes. $7.01 million is Indian advertising, and Indian revenues are $1.29 million, making a total of $6.3 million dollars.

Unidentified Analyst

Thanks. So what’s driving the online advertising segment and the online US, both showing dramatic year-over-year growth. How much of this is added (inaudible) increase and how much of this is pricing increase?

Joy Basu

I think that there will be no significant price increase during this quarter, so I think most of it comes from volume.

Unidentified Analyst

So, is it fair to say that the 92% year over year, is that volume, is that traffic quote or is that actual increasing number of ads you’re hosting on your pages?

Joy Basu

Both, it could be a function of both. But basically I think the underlying driver would be the unique users and page views that they consume and the number of adds per page. Also you have growth.

Unidentified Analyst

OK. So what I think I’m hearing is that volume is up around 90% year over year if your pricing is flat?

Joy Basu

Interesting that you asked, because we haven’t reported that yet. But we are looking for a reliable third party in sourcing that. If you’re providing information from our server logs it can lead to major distortions in the numbers because of the fact that a significant proportion of users in India come to us from cyber cafes so it is difficult to count the number accurately.

So we are struggling to get a reliable third party who will report on traffic. We hope we will have media metrics one of these days and we can report on it.

Unidentified Analyst

OK. But just in general in the business metrics I guess you definitely probably track pricing on (inaudible) as pricing, so just conceptually, if pricing is not picking up for contracts that are rolling then the large driver would be unique users, traffic increases and then being able to increase the number of adds you are actually selling.

So a combination of that would lead me to some kind of 90% year-over-year volume growth with flat pricing, unless I’m missing something.

Joy Basu

There’s one element that you’re missing and I’ll tell you what that is. As the proportion shifts exactly but surely direct sales based advertising, and you need higher click-throughs, you’re getting more and more productivity out of those pages.

We have this, but of course we’ve not broken it down, so for the same number of pages you can get higher click through rates and better prices, as you go along. So that’s a shift we’ve decided to take as well, and for the public.

Unidentified Analyst

But would that not be manifested to blend the pricing across your business? Because those would be higher priced price per click right?

Joy Basu

Yes, but if you look at the number of pages sent, for a similar number of pages you get higher revenue.

Unidentified Analyst

So what percentage of inventory is currently being sold?

Joy Basu

I don’t have ready number for you yet but I can tell you we are close to the contact. We don’t have that much inventory left to give away.

Unidentified Analyst

What do you think your market shares today of phone line ads spent among India’s large Indian portals?

Joy Basu

On this question, I think the last quarter we told them I said that our guess is that some number between one-fourth, 25-33% of the Indian online space – but among the major (inaudible), the expense we have is about one-fourth to one-third.

Unidentified Analyst

Going back to India online segment. Looking at advertising, revenues yearly in the June quarter were up 68% and then 94%, 93% and 92%. So if you assume mostly traffic and inventory growth, and you’re fully sold on inventory, is there an opportunity to raise pricing going forward, because you’re basically sold on inventory and traffic’s fully increasing and you’re one of the only four portals people advertise on in India?

How do you think about that strategically? It looks like you’re in a very good position. I don’t know if that’s something you think about or have discussed with clients.

Joy Basu

I think about it all the time. Better pricing is a function of supply and demand. One good thing about that is the increasing number of venture-funded websites, which are being formed, has ended. There was a peak in the year 2000 then there everything dried up for the next six years and since the early part of 2000 a large number of them have set up shop and they’re starting to fund.

Every week we get some announcement about a new website being funded. That’s important because that kind of froze the trend, as one part of our annuity comes from…part of the people do investment spending to grow.

The second segment of people who are already in business and jobsites, they have growth but they have a limit on how much they can pay for the advertising. So they pay for the advertising to get (inaudible).

They tend to be choosy about what they can afford and expect there. So both of these factors seem to be working together. You tend to see a mix of these as you go along.

Unidentified Analyst

What are you planning with the cash, anything substantial in your sites?

Joy Basu

Well, nothing at the moment. We keep sustaining and adding interest. We keep looking for opportunities to invest in and for big companies to contribute to the value of our services.

As you know, we made one in the last quarter. We keep looking for more. We think that we use cash very carefully to augment the correct line. Some people like to use it to buy traffic but that doesn’t seem to make sense.

Unidentified Analyst

One last question on the cost of content. What exactly is that comprised of? Are you buying exclusive rights to content or are you developing your own content? Because the margins for those types of businesses are very different, I would say.

Joy Basu

Well as you can see, our gross margin has expanded so we’re not buying any expensive content. If we had our gross margin would not have picked up.

Unidentified Analyst

But that’s as you said a mix shift. But within your business, most of your content is self-generated?

Joy Basu

No, not at all. As you probably know, 60% or so of our content tends to be user generated. The only part we create is that we have a news ring, to generate news around the clock, and I’m sure you’ve visited that site, as well. It’s small and not part of the cost at all. So that there is no shift quoted on quarter or even year-on-year on those costs.

Unidentified Analyst

OK. Thanks a lot and wish you guys all the best.

Operator

Again to ask a question, participants from India and US press star one.

At this time there are no further questions. I will now turn the call over to Ajay Menon for final remarks.

Ajay Menon

Thank you very much for joining us this year and we look forward to seeing you in three months time. Thanks.

Operator

That brings us to the end of REDF’s conference call for the fourth quarter and fiscal year end of March 31st 2007. Thank you for participating in this conference call.

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Davis Consultants Asia

Davis Consultants Asia is a multi- disciplined consulting practice focused on business development and advisory services in the data storage industry.

Established in 1994, and headquartered in Kuala Lumpur, Malaysia, Davis Consultants leverages many years of experience and extensive contacts throughout the industry to provide a wide range of services. These include Asia location development, joint venture development, technical & business due-diligence assessments, and buy-side investment research services tailored to our client’s specific needs.

Our mission is to provide efficient, accurate, and timely information and advisories in the data storage industry.

Davis Consultants Asia publishes the Data Storage News Summary® , a news aggregation service, which is distributed by email on a complimentary basis twice per week.

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