Sify F2Q07 (Qtr End 9/30/07) Earnings Call Transcript

Sify Ltd. (SIFY)

F2Q07 (Qtr End 9/30/07) Earnings Call

October 24, 2007 9:00 am ET

Executives

David Thierry - Investor Relations

Raju Vegesna - Chairman and CEO

Suri Venkat - COO

Vijay Kumar - CFO

Analysts

Colin Gillis - Canaccord

Mike Cahill - Chilton Investment Company

Louis Corrigan - Kingsford Capital

Presentation

Operator

Greetings and welcome to the Sify Technologies Limited Second Quarter 2007 Earnings Results Conference Call and webcast. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions).

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Thierry, Investor Relations for Sify Technologies Limited. Thank you Mr. Thierry, you may now begin.

David Thierry

Thank you, Operator. I'd like to send a warm welcome to all our participants today, on behalf of Sify Technologies Limited. I'm joined on the call today by Raju Vegesna, Chairman of the Board and Chief Executive Officer; Suri Venkat, Chief Operating Officer; and Vijay Kumar, Chief Financial Officer.

Following our comments on the results, there will be an opportunity for questions. If you do not have a copy of our press release, please call the Global Consulting Group at 646-284-9407, and we will have one sent to you.

Alternatively, you may obtain a copy of the release at the investor information section on the company's corporate website, at www.sifycorp.com. A replay of today's call may be accessed by dialing in on the numbers provided in the press release, or by accessing the webcast in the investor information section of the Sify website.

Some of the financial measures referred to during this call and in the earnings release may include non-GAAP measures. A presentation of the most directly comparable financial measures calculated and presented, in accordance with GAAP, and a reconciliation of such non-GAAP measures of the differences between such non-GAAP measures and the most comparable financial measures calculated and presented in accordance with GAAP, are also available on the Sify's website.

Before we continue, I would like to point out that certain statements contained in the earnings release and on this conference call are forward-looking statements, rather than historical facts that are subject risk, and uncertainties could cause actual results to differ materially from those described.

With respect to such forward-looking statements, the company seeks protection afforded by the Private Securities Litigation Reform Act of 1995. These risks include a variety of factors including competitive developments and risk factors listed from time to time in the company's SEC reports and public releases.

Those lists are intended to identify certain principal factors that could cause actual results to differ materially from those described in the forward-looking statements, but are not intended to represent a complete list of all risks and uncertainties inherent to the company's business.

I would now like to introduce Mr. Raju Vegesna, CEO of Sify Technology's Limited. Raju.

Raju Vegesna

Thank you, David. I would like to welcome everyone on the call once again, thank you for joining us. I will now commence with the opening remarks on our performance in the last quarter.

We have done well to accelerate our revenues in the Enterprise market. With the business models, our team our now well set and beginning to yield results. We will continue to grow [Technical Difficulty] going forward. We also initiated the integration of our consumer services lines and infrastructure, leveraging synergies across all consumer platforms.

We believe we'll be able to see the results of these initiatives over the next few quarters. However, the full benefit of these efforts will be realized during the course of the next year.

Now, I would like to introduce Mr. MP Vijay Kumar, our Chief Financial Officer, who joined recently. I will now request him to take through our financials

[Technical Difficulty].

Vijay Kumar

Thank you Raju, and hello everyone. [Technical Difficulty]that I am delighted to be part of this equity and to be able to contribute to the company's growth story. I shall now go in to the details of our financial performance for the quarter.

Our revenues were $37.02 million for the second quarter, ended 30 September '07, 4.7% higher than the immediately preceding quarter and 6.4% over the same period last fiscal.

Sify's net profit was $1.12 million, as against $0.58 million in the previous quarter. However, post exceptional, [Technical Difficulty] $1.25 million, as compared to the previous quarter and a loss of $1.27 million.

We incurred exceptional expenses of $1.8 million for legal expenses this quarter, relating to a case against another Internet company. The total expenses incurred so far in this regards amount to $3.27 million during the current year. [Technical Difficulty], as against the cash profit of $3.32 million in the preceding quarter.

Our efforts to bring down the provision for doubtful debts, PDD, have resulted in their coming down to less than significant level, and I believe we will be able to manage them at these levels going forward. We have also done well to generate cash from operations during the quarter and expect to continue doing so in the future.

I will now hand over to Suri, who will take you through some of the key initiatives during the quarter. Suri?

Suri Venkat

Thank you, Vijay, and good morning, everyone. The Domestic Enterprise business continues to see gains from a number of new and prestigious customers, as well as additional business from our existing customers.

Our approach to the market with end-to-end managed services being promoted by a unified theme is also bearing fruit. We believe our efforts going forward will accelerate with the aggressive marketing of our services.

We have launched a number of strategic new services during the quarter, including Hosted Contact Centre solution for the domestic and international IT-enabled services and call center companies.

Managed voice services for inbound services on MPLS connectivity that enables voice, video and data carriage on internet protocol and premium antivirus and anti-spam services as a part of our software as a service offering. This is targeted towards the small and medium enterprises segment to protect their messaging system.

We also see momentum in our international enterprise services with the opening of our UK branch, which will be our base to pursue business in the UK and Europe. We have also [Technical Difficulty] our pilot with a large global automobile major subsequent to which we have received a number of RF feeds from them.

Sify eLearning has won two more Brandon Hall Excellence in Learning Awards, a silver and a bronze, [Technical Difficulty] developed for two of our key customers. This recognition follows our winning two gold awards last year, again, for courses developed for our key customer of us.

The Oscars, for example, when you look at the movie industry, so which testifies to the fact that Sify is one of the leaders in the international eLearning space. Details of some of the other key wins across both these businesses are available to you in the press release.

One of the key initiatives in our retail access business was the launch of the innovative new service, Sify Anywhere, in Mumbai and Delhi. The high impact launch activities included various promotional events in Delhi and Bombay, including motorbike [Technical Difficulty].

Sify's Internet Telephone Booths enable the common man to walk-in and make an international call at very low rate. A price revision during the quarter making call charges simple and even more affordable [Technical Difficulty] market response.

Instead of a long list of different rates for various countries, we innovatively clubbed countries together into four categories either at Rs2 per minute or Rs4 or Rs8 or Rs10. This resulted in a 40% growth of voice minutes during the quarter vis-à-vis the previous quarter.

To widen our reach, and to improve the quality and the reliability of our broadband-to-home services, we have conducted a pilot wireless technology deployment for consumers in Bangalore. The objective of the pilot was to study customer acceptance as well as judge service delivery.

The pilot saw 72 customers coming on board during the quarter. Our experience with this pilot will guide us in taking decisions in this regard in the future for deployment of wireless technology led broadband deployment.

Our Direct selling Agents program has been a further strategic initiative to improve customer acquisition [Technical Difficulty] in customer acquisition during the quarter compared to the first quarter, due primarily to this particular [Technical Difficulty].

During the quarter, through a new initiative, we ensured that 175 cafes now open at 6:00 AM and remain open for a longer period of time to enable additional hours when subscribers can use the services provided by this infrastructure. This will be gradually extended, based on the market response, and the traffic and revenue trends.

We also continue to focus on eCommerce services at our cafes to make them into eStores for fulfillment of various kinds of eServices. The market is beginning to respond with a number of transactions having grown by 60% to 67% during the quarter, while the value of transaction grew by 72% during the quarter.

As part of the objective to progressively increase the range of services covered for additional revenues, 100 Sify cafes now have flat screens on to which advertisements are beamed on a revenue share basis with an Out of Home Media company. We are also paid a monthly rental per cafe on the flat screens.

Sify will also get 10 minutes per hour of air time to broadcast commercials for our own services in to the cafes. We have also entered into an alliance with Xerox for photocopying services at the iWay cafes.

Whilst the bank would fund [Technical Difficulty] available a large number of free copies from the franchises to kick-start the business. Local promotions around the iWays were also initiated during the quarter, to expose them to the new users. We hope to see the benefits of these initiatives going forward.

Our portal Sify.com entered into an alliance with a popular TV channel, Sony Entertainment Television to increase brand visibility and bring viewers of popular TV shows on to the Internet medium. In turn [Technical Difficulty] for online information and interaction platforms on Sify.com, like message boards, polls and chats.

The success of this initiative was evident with over 300,000 messages received from users on the reality show website for a program called Indian Idol, on Sify.com. The official site for Indian idol on Sify.com contributed to 15% of the incremental page views for our portal, and was accessed [Technical Difficulty] once again [Technical Difficulty] partner with Sify.com for the website of Jhalak Dikhla Jaa, a new program which is the Indian version of the dance-based reality show Dancing [Technical Difficulty] exclusive moments, recaps etcetera, and is also highly interactive offering polls, message boards, and chat.

To gain new visitors from amongst young Indians living abroad, to work and study. The leading website for overseas Indians, Samachar.com was revamped with an all new look and feel, with new services based on user feedback.

Samchar.com brings India up close and personal to Indians overseas, with users now able to search archives for news by date and from over a 100 publications in six languages. The Samachar.com directory was launched to enable users to enlist their business or services to be able to find buyers and sellers too.

During the quarter, Sify.com launched chennailive.in, the first broadband and video website for the city of Chennai. After the successful launch of mumbailive, bangalorelive, and hyderabadlive, this is the fourth broadband city portal from Sify.com, which brings these cities live in video on the web for the citizens of these places.

Sify shopping also saw increase in business during the Raksha Bandhan festival season celebrated through out the country by Indians living abroad and in India, where gifts are exchanged between brothers and sisters.

Sifymall.com has also entered into alliances with credit card companies to increase transactions and provide better value, and offers new products and discounts to their users. This brings us to the end of this section, and I will handover to Raju for his closing remarks. Raju?

Raju Vegesna

[Technical Difficulty], that our focus going forward will be on growing our business profitability. We have passed the hurdle doubtful debt and have cleaned up the financials. We are generating in cash and are not profitable and have $50 million cash reserve to fund our growth.

We are well set with our Enterprise business, we will see the benefits of new initiatives on our consumer side of the business going forward, especially during the course of the next year. I will now hand over to the operator for questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first question is coming from Colin Gillis of Canaccord. You now ask your question.

Colin Gillis - Canaccord

Yes, hello everybody.

Vijay Kumar

Hi Colin

Raju Vegesna

Hi Colin.

Colin Gillis - Canaccord

Hi Raju, just want to make sure you hear me here. So just briefly, what are you seeing for targets in the United States, and what is your appetite for expansion in that region?

Raju Vegesna

Now we have the money and we have the machine cleaned up, I think we are going to be looking at some acquisitions on our international market, especially our infrastructure management services.

Colin Gillis - Canaccord

Okay, great. And then just on the Internet side, you've got a pretty strong base of users, any notion of turning that into a social community of any kind or increasing that efforts beyond the game plan?

Raju Vegesna

Yes. So basically, it is more of a social network kind of community, if it makes sense. And we are coming up with new plans in that, how do we’re going to turn our portal business. And Suri, you want to elaborate this?

Suri Venkat

Yeah. You know, for example, the city live sites that we have cater to specific cities and people living in those cities. And we are also ramping up programs, publicity programs, which are going to be built around building communities within those locations.

From that, of course, we have a couple of other plans for cross national community network, which we would be coming forth with in due course of time.

Colin Gillis - Canaccord

Okay. Just the last piece on that side of the business. Any efforts to attract global brands and to hire direct sales that might be based out of New York City or other major centers of the world?

Raju Vegesna

I am not very clear about the question, Colin.

Colin Gillis - Canaccord

Sure. You know, in order to attract direct advertisers, are you looking to expand the sales force and have representative in major cities?

Raju Vegesna

Yeah. But see, if you look at it, Colin, majority of our business is in India.

Colin Gillis - Canaccord

Yeah

Raju Vegesna

And we are India-focused. And Sify brand in India is very strong. And so, we are going to count on that. And if you look at -- we are invested -- if you see, the Sify name also changed into the Sify Technology. And we are putting in the new branding campaign coming up, and that is the market we are looking at.

Colin Gillis - Canaccord

Sure. I guess…

Suri Venkat

Colin, just to round it off, there are two aspects of this. One is related to Samachar, which is primarily targeted at Indians living abroad.

Colin Gillis - Canaccord

Yeah.

Suri Venkat

Significant number of them also being in the US. We already do have some advertising going on there. The other aspect is that a significant number of the Fortune 500 Companies are already present and operating in India, and they are a part of our target segment for advertising.

Colin Gillis - Canaccord

Sure. But do you need to target them directly or do you need to target the ad agencies to get their budgets?

Suri Venkat

We have to do both.

Colin Gillis - Canaccord

Okay. So, I mean, is it unthinkable that you might be expanding your presence in New York to target the ad agencies more?

Raju Vegesna

No. A significant part of the advertising is done locally in India through Indian advertising agencies or international agencies present in India.

Colin Gillis - Canaccord

Yeah.

Raju Vegesna

So those are the people that we currently work with.

Colin Gillis - Canaccord

Got it. Okay, great. Thank you.

Raju Vegesna

Thank you.

Operator

(Operator Instructions). Our next question is coming from Mike Cahill of Chilton Investment Company.

Mike Cahill - Chilton Investment Company

Hi, guys. Nice quarter on the revenues. Just a couple of clarifications because you were cutting in and out a little bit on the call. What was the actual provision for doubtful accounts in the quarter? Hello.

Vijay Kumar

The provision for doubtful debts for this quarter is $0.75 million.

Mike Cahill - Chilton Investment Company

How much?

Vijay Kumar

As against $1.28 million last quarter.

Mike Cahill - Chilton Investment Company

What was the figure? I'm sorry, I couldn't hear that.

Vijay Kumar

I am Vijay Kumar, CFO.

Raju Vegesna

No, no. How much is the figure?

Suri Venkat

$0.75 million.

Mike Cahill - Chilton Investment Company

Okay. And could you just go into a little more detail on this lawsuit with the other internet company.

Raju Vegesna

What would you like to ask or understand, Mike?

Mike Cahill - Chilton Investment Company

Who is the company and what is the lawsuit over?

Raju Vegesna

The company that we have this lawsuit is with Yahoo. And the lawsuit is about content and information about Sify, which has been transported, transferred or whatever words you need to use illegally into Yahoo.

Mike Cahill - Chilton Investment Company

Got it. Okay.

Raju Vegesna

And they had access to this information, which we have contested, and to various other steps taken, which have hurt our business.

Mike Cahill - Chilton Investment Company

And how much are you suing them for in terms of damages?

Raju Vegesna

We don't have a number at this point of time to share as a matter of sub judice.

Mike Cahill - Chilton Investment Company

But, I mean, given that you've spend $3.2 million so far, it's a just pretty large number?

Raju Vegesna

Well, we certainly expect that to be so, yes.

Mike Cahill - Chilton Investment Company

Okay. Nice to have you on the cash this quarter. Thanks.

Raju Vegesna

Thank you.

Operator

Thank you. Our next question is coming from Louis Corrigan of Kingsford Capital. You may proceed with your question.

Louis Corrigan - Kingsford Capital

Hi. I had a question regarding the internet access business.

Raju Vegesna

The internet?

Louis Corrigan - Kingsford Capital

The retail internet access business.

Raju Vegesna

Right.

Louis Corrigan - Kingsford Capital

It looks like that revenue was down sequentially. But at the same time the number of iWay cafes rose about 180 and that the number of broadband subscribers bounced back from them, were up about 3,000 net sequentially.

And yet -- and the ARPU was also -- it looks like up slightly sequentially. So I am just wondering why was the retail internet access revenue down, was there a weaker revenue for internet access?

Raju Vegesna

Yeah. So whilst the -- our basic model that we’ve been working with over the last couple of quarters, which is now falling into place has been to ramp up the kind of services that we’re able to offer through the cafes, and that's where the effort, focus and investment has been.

You would appreciate that over a period of time, there are people who move in and out of the iWay café access systems in terms of new users coming in and some of the old users going on to their own systems at home through the broadband service.

Similarly, in terms of competition and rates offered through various points of time during the day, there would be variations in revenue as long as it is restricted only to pure browsing, because broadband access through cafes is a price-sensitive component.

Sify is now graduating from pure browsing model to a services model, where we are tying up partnerships at various levels, for various kinds of e-Commerce services or e-Services, including what has been shared earlier in terms of railway ticketing, mobile recharge, et cetera.

We are extending this further in terms of offering education platforms access to net education platforms also in addition to other new services that would be coming in through this quarter.

Louis Corrigan - Kingsford Capital

Well, I guess that makes it even more complicated for me, because it seems like if you’re adding more services and you’re getting better at pricing your services for a varied customer base that your revenue in that segment actually should be going up instead of down. So …?

Suri Venkat

What we have said is, these are things, these are steps that we have introduced now, and we expect to see the growth coming in during this quarter and the next. These are new initiatives.

Louis Corrigan - Kingsford Capital

Okay. So this is a transition period that we are going through now?

Suri Venkat

That's right.

Louis Corrigan - Kingsford Capital

Okay, thank you.

Suri Venkat

Thank you.

Operator

(Operator Instructions). Thank you. There are no further questions at this time. I’d like to hand the floor back over to management for any closing comments.

Raju Vegesna

Thank you, everyone, for joining us on the call. We look forward to interacting with you all through the quarter around this time thereafter. Thank you and goodbye.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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