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

Nov. 1.07 | About: India (REDF) India Ltd. (NASDAQ:REDF)

F2Q07 Earnings Call

November 1, 2007 8:30 am ET


Deb Saha - Investor Relations Contact

Ajit Balakrishnan- Chairman and Chief Executive Officer

Joy Basu - Chief Financial Officer


Ashish Thadani - Gilford Securities

Amit Debas - Analyst

Gilda Battista - Analyst

Gaurav - Volkswagen

Narendra - Analyst


Good morning and welcome to the Conference Calldeclaring the Earnings Results for the Second Quarter Ended September 30, 2007.During the call, all telephones are in a listen-only mode.

After the call, we will conduct a question-and-answersession and instructions will follow at that time (Operator Instructions). As areminder, this conference is being recorded.

I would like to introduce you to your host for theconference, Mr. Deb Saha, Investor Relations Contact, India Limited.

Deb Saha

Thank you Michelle. Wish you all a very good morning andthank you for being with us to discuss's financials for the secondquarter ended September 30, 2007. I would like to introduce you to the membersof management present on this call, who will take you through the highlights ofour Company's performance.

We have with us Mr. Ajit Balakrishnan, Chairman and CEO, andMr. Joy Basu, our CFO. As mentioned earlier, all of you are currently on alisten mode only. This conference call will last for about 20 minutes and thenwe'll be glad to answer any questions you may have.

For your immediate and ready reference, we have also postedthe earnings release for the second quarter ended September 30th, 2007 on ourwebsite at You may also call me at our office in India at91-22-2444-9144, extension 202, and we will be glad to fax or email you a copyduring the course of this call.

Before proceeding, I would like to mention that during thisconference call, except for the historical information and discussionscontained herein, statements may constitute forward-looking statements for thepurposes of the Safe Harbor provisions and under the Private SecuritiesLitigation Reform Act of 1995.

These statements involve a number of risks, uncertaintiesand other factors that can cause actual results to differ materially from thosethat may be projected by these forward-looking statements.

These risks and uncertainties include, but are not limitedto, a slowdown in the economies worldwide and in the sectors in which ourclients 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 customerproducts, the widespread acceptance of the Internet, as well as other risksdetailed in the latest annual report on Form 20-F, filed by with theSEC. and its subsidiaries may from time to time makeadditional written and oral forward-looking statements, including statementscontained in the Company's filings with the SEC and our reports toshareholders. and its subsidiaries do not undertake anyobligation to update any forward-looking statements that may be made from timeto time, by or on their behalf. These reports are available with the SEC or areavailable upon request by emailing at

Now, I would now like to introduce Ajit Balakrishnan, ourChairman and CEO.

Ajit Balakrishnan

Thank you, Deb, and good morning to all present. To begin,I'd like to share major highlights of the environment in which we operate. TheIndian economy started well in the new financial year 2007/2008.

According to the Indian Central Statistical Organization,the Indian economy grew during the first quarter of financial year 2007/2008,with a real GDP growth of 9.3% compared to the same quarter in the previousfiscal year.

The Indian PC market according to IDC, International DataCorporation, an independent market research company, grew 22% in terms of salesvolume during the quarter ended June 2007 as compared to the same quarter lastyear.

The Indian mobile subscriber base according to the TelecomRegulatory Authority of India grew $209 million, grew to $209 million as ofSeptember 30, 2007, representing a 61% increase compared to the same date lastyear.

Our own registered user base grew to 59.8 million users atend September 2007, which was a 25% increase compared to the same date lastyear.

Our revenues totaled $7.1 million for the quarter endedSeptember 30, an increase of 18% compared to the same quarter last fiscal year,with India Online revenues increasing by 22% to $5.73 million and U.S.publishing revenues increasing by 9% to $2.13 million.

Within the India Online business segment, advertisingrevenues totaled $4.26 million for the quarter ended September, an increase of18% compared to the same quarter last fiscal year. Fee-based revenues totaled$1.47 million, an increase of 35% compared to the same quarter last fiscalyear.

The highlights of our India Online advertising business areas follows. The number of companies advertising on our website for the quarterended September 30 totaled 190, as compared to approximately 160 during thesame quarter in the prior financial year.

The following five industry categories accounted for 56% ofour revenue. Consumer finance, employment, travel, matrimonial and insurance.For the quarter ended September 30, the top 10 advertisers contributed 45% ofadvertising revenue for the India Online advertising business, compared to 57%during the same period in the prior fiscal year.

Our strategic thrust continues to be product innovation,using the latest technologies with the goal of offering value-added services toour users. In executing this strategy, we continued adding new elements to ourplatform and enhancing current ones.

Our video platform iShare launched last quarter has gatheredmomentum. We continue to enhance the platform. A new video and audio playerwith auto play, a facility to view videos in full-screen mode, and a lighterversion of the iShare client are some of the new features we introduced.

We have started beta testing Rediff Language Search in eightIndian languages. This allows users to enter Indian language queries usingQWERTY keyboards and obtain results in their desired language.

Our Consumer Finance channel, Moneywiz, was enhanced withMarket Voices, a live running commentary during market hours. This commentaryis updated every few minutes, during the trading hours in the Indian stockmarket.

As I mentioned in last quarter's call, competitive activityin the Indian market is increasing, particularly from Yahoo, Google, MSN, andAOL, and I expect these competitive pressures to intensify over the next fewquarters.

We have a number of initiatives underway to deal with this.This includes more sophisticated behavioral tracking algorithms to improveclick-through rates, increasing the range of advertising inventory units andlaunching of new features to existing services.

These initiatives require us to step up capital expenditureand expenditure on product development and bandwidth. We plan to furthercontinue such investments over the next few quarters. We believe theseinvestments today are necessary to maintain our leadership position.

There is evidence that these investments are starting toshow results. According to data compiled by comScore Media Metrix for India,our unique users grew by 9% during the quarter July/August/September over theprevious quarter, while the market growth was just 6%.

Over the same period, Google, MSN and Yahoo grew uniqueusers by 9%, 2% and 6% respectively.

Our page views during the quarter grew 49% over the previousquarter, while page view growth in the total Indian market was only 1%. Overthe same period in the Indian market, Google and MSN page views declined by 3%and 12% respectively, while Yahoo's site grew by 4%.

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

Joy Basu

Thank you, Ajit, and good morning to all. Overall revenuesfor the quarter ended September 30, 2007 were $7.9 million, an increase of 18%over the corresponding quarter last fiscal year.

During this period, revenues from India Online were $5.73million an increase of 22% over the corresponding quarter last fiscal year.

Revenues from our U.S. Publishing business were $2.13million for the quarter, an increase of 9% over the same quarter last fiscalyear. Within the India Online business segment, advertising revenues totaled$4.26 million for the quarter ended September 30, 2007, an increase of 18%compared to the same quarter last fiscal year, and fee-based revenues totaled$1.47 million, an increase of 35% compared to the same quarter last fiscalyear.

Gross margins increased to 82% for the quarter, compared to80% for the prior-year quarter. Operating expenses during the quarter increasedby 29% to $5.39 million compared to $4.19 million for the same quarter lastfiscal year, primarily due to higher product development, bandwidth and generaland administrative costs.

Operating EBITDA decreased marginally to $1.04 million forthe quarter ended September 30, 2007 as compared to an operating EBITDA of$1.14 million for the corresponding quarter last year.

As you are aware, operating EBITDA is a non-GAAP measure andwe direct you to our press release dated today, which sets out thereconciliation of operating EBITDA to net income. Depreciation expensesincreased to $1.46 million for the quarter compared to $0.60 million for thesame quarter last fiscal year.

Interest income increased to $1.44 million as compared to$0.91 million for the year-ago quarter. There was a foreign exchange loss of$0.12 million during the quarter ended September 30, 2007 arising from theconversion of cash deposits and other balances held in U.S. dollars into thecompany's functional currency, the Indian rupee, due to strengthening of theIndian rupee against the U.S. dollar. Net income for the quarter endedSeptember 30, 2007 was $0.89 million as compared to a net income of $1.50million for the comparable quarter last fiscal year.

Net income per ADS for the quarter ended September 30, 2007was $0.0304 as compared to a net income per ADS of $0.0514 for the comparablequarter last fiscal year. Total cash and cash equivalents stood atapproximately $59.1 million as of September 30, 2007.

This concludes our financial review for the quarter and Iwould now request Ajit to sum up the call.

Ajit Balakrishnan

Thank you, Joy. Here is a summary. Our registered user basegrew 25% year on year. To maintain a leadership position, we continuedinvesting in enhancement of our services. These include new features to ourvideo sharing platform iShare and to our new Consumer Finance channel Moneywiz.We started beta testing our new search platform for Indian languages usingadvanced predictive technology. Key financial metrics for the quarter are asfollows.

India Online revenues and U.S. publishing revenues grew 22%and 9% respectively. Increased overall company revenue for the quarter to $7.9million, an increase of 18% compared to the same fiscal quarter last year.Operating EBITDA was $1.04 million. Net income was $0.89 million or $0.0304 perADS. The latest report from comScore Media Metrix shows that our stepped-upexpenditure on product development is probably starting to bear fruit.

Our unique user growth, 9% during the quarter, is ahead ofboth the market growth as well as the growth of our main competitors, and so isour page view growth.

We believe that we are entering an era of heightenedcompetitive activity from our international competitors such as Yahoo, Google,MSN and AOL, and consequently, we'll continue to maintain a high level ofcapital expenditure, as well as expenditure on product development andbandwidth. This increased expenditure, we believe, will stand us in good steadby improving the competitiveness of our product offerings.

Thank you very much and we now look forward to yourquestions.

Question-and-Answer Session


Thank you, Mr. Balakrishnan. We will now begin the questionand answer session (Operator Instructions). Your first question comes from theline of Ashish Thadani.

Ashish Thadani - Gilford Securities

Yes. Good evening, gentlemen. I have two or three questions;I'll start with the first one. Do you anticipate the budgetary issues thatwe've witnessed in the last quarter to become an annual pattern?

Or would it be more appropriate to assume sequential growthin the March to June quarter for modeling purposes and so on? And then I have acouple of follow-ups as well.

Ajit Balakrishnan

Ashish, you're perhaps referring to the slow start of thecurrent financial year, April, May, June, right?

Ashish Thadani - Gilford Securities

Yes, yes.

Ajit Balakrishnan

We think it's unusual because it coincided, the start of thefinancial year coincided with a number of new entrants and increased aggressiveactivity by Yahoo!, AOL and to some extent Google as well. So we don't believethat the kind of dip that we saw is likely to recur and it's unlikely thatit'll recur. It will probably continue growing.

Ashish Thadani - Gilford Securities

Okay. That's helpful and then the second question is thatdepreciation and amortization continues to rise as a percentage of revenue, andyou certainly spoke about this on the last call. But as a percentage ofrevenue, do you think that we can see some stabilization or a decline in thevery near future?

If you can speak to that, that would be most helpful.

Ajit Balakrishnan

I think this immediate past quarter saw a kind of what Icall a lumpy increase. And the reason for that is that we talked about it lasttime too, but I think it's worth repeating. I think for many, many years ourhosting services was really at one center with one ISP, which is VSNL.

Now, as the Indian telecom market has evolved, we haveextended many of our servings, particularly our mail service, to two additionalISPs, Reliance as well as Bharti. Now, that has had a significant one-timecapital expenditure associated with that. That continues, but much of it islumped into this last quarter. So, I think that explains one of the reasons whythe number jumped up a little bit.

I do not believe that obviously, as growth continues, ourpage views is starting to rocket upwards. We're happy about that piece. What itprobably means is capital expenditure will continue at a high level. We do notbelieve there are any surprises coming in this coming quarter, at the risk ofmaking a forward-looking statement here.

Ashish Thadani - Gilford Securities

Okay. And finally, how has the first month of this quarterprogressed compared with your exit rate in the September quarter? I just wantto see the kind of momentum that may or may not be building as the year hasprogressed.

Ajit Balakrishnan

I think it's continued on track. There are no surprises sofar. I think that nearly 30 days are done. There are no surprises so far. Ithink particularly on the advertising front, I think the year did get off to avery slow start. It improved considerably over the last quarter, as you haveseen, August, September.

I think that growth momentum continues, but I think you mustremember there is a lot of competitive activity, so it's not that we've done acareful study. It's not that prices, the CPM average, CPM prices, have not comedown at all for us last quarter.

But what is happening is that customers are gettingbewildered by the variety of choices that they have. And they tend to shoparound a little bit and perhaps even try apparently low-price offers till theyrealize that they don't get the results that they need and then they come backto us.

But that whole decision cycle continues to be delayed, notas much as it was in April, May, June. But until you compared to six months agoor nine months ago, I think it continues to be slow. So don't expect anysubstantial upside.

Ashish Thadani - Gilford Securities

But the trend has been an improving one, as the months haveprogressed in the first quarter, at least? Is that a fair statement?


Yes. I think there are two elements to this trend. One ishow is pricing looking up, how is pricing looking. So, I think we did a studyand there is absolutely no deterioration on the average prices across our fullsite in the quarter of September compared to the previous quarter.

And there is no deterioration in the current quarter aswell, in the first month of this quarter. So, the price part is pretty okay. Onthe volume part is where the question marks arise. I think generally, on thevolume side, I think the trend continues as healthy as last quarter. But we'renot yet seeing a big jump upwards. We're not seeing that yet.

Ashish Thadani - Gilford Securities

That's very helpful. Thank you very much and good luck.


Your next question comes from the line of Amit Debas (ph).

Amit Debas - Analyst

Hi, Ajit. Your India Online advertising revenue I see hasgrown 18% year-over-year. How fast do you think the overall market had grown?

Ajit Balakrishnan

We have reason to believe, from all available informationthat if you take the three leading players which is ourselves, Google andYahoo, all three have grown about the same rate. And I think all three are atthe same level in terms of revenue, about give or take 10%.

Here, as you know, they don't publish their resultsseparately for India. So, we take it together from our side. My assessment isthat all three of us are at the same level, give or take 5% here or there. So,I think, all are growing at about the same level. The growth rate is about thesame level. And all other players in the market are substantially smaller thanus. The three of us probably account for 70% or 60%.

Amit Debas - Analyst


Ajit Balakrishnan

So, we part of the market's still growing.

Amit Debas - Analyst

Okay. Thanks. I had another question, this one on the onlinefee revenues. As we know, it includes subscription, value-added services andonline shopping. Now, which one of these has been growing faster than theothers? And if you can just comment on each one of them?

Ajit Balakrishnan

I think, there are three pieces inside. We've not broken itdown before. But I can tell you what the three pieces are. There is an onlineshopping piece, which, as you know, in India continues to be quite slow. Thereis growth, but there is not any substantial growth and it's held up essentiallybecause of the low credit card penetration.

So, services like auctions are not yet getting traction,either for us or for eBay. They've also commented on that. So that piececontinues to grow but at a very slow rate. And the second piece is mobile.

Now, so far as mobile is concerned, I think we clearly havea leadership perception. Consumers see us as the one place to go to for a widevariety of ringtones. If my memory serves me correct, we have 60-odd or 50,000to 70,000 ringtones to choose from. And many different surveys have indicatedconsumers see us as the leading player and what comes to mind when they need tosearch for ringtones.

So that part of the business grows. But as you probablyknow, the revenue share in India from the mobile operators is very adverse tothe value-added service players like us. The weighted average margin, we getfrom things we do is probably 18% or 19%. Most markets in the world, it'supward of 50%. So, that continues to be a dampener. So that grows, but it isnot anything substantial.

The third piece is the part where we provide domain namesand corporate e-mail accounts. That has grown faster than the other two. Ithink, we have not broken this down. But I think the growth rate of this piece,which is the domain names and corporate mail services, is the one which isgrowing faster than the other two and driving virtually all the growth of thatsegment.

Amit Debas - Analyst

Okay. Thank you. And there has been a recent mandate by thegovernment where the short codes have been changed to five digits. Has that hadany material effect on your value-added services revenue?

Ajit Balakrishnan

Well, it's dampened the whole market, while there's somedegree of confusion, first on what is the code and whether it will beimplemented. That took about three, four months. Okay? I think the newspapersreported every possible combination. I'm sure the consumers got confused duringthat time. Subsequent to that, it had some dampening effect. But you mustremember that the bulk of our mobile services are not dependent on consumersremembering that number. That's not the way it works.

They come to the website, search for the tune, find thenumber and enter this number. That's the way our model has succeeded. There areothers in the marketplace, who have widely advertised their number, and they'redependent on consumers to remember that number and search for it.

So I'd say in the balance we're less affected than manyothers in the market, partly because I've personally never believed that thesenumbers would substitute for brand names and have discouraged our team fromusing them as substituting brand names.

We had a slight dampening effect, but I would imagine thewhole market was affected much more than we have been. But you must rememberthis is a settling in period and consumers go back to ordering the things thatthey want to in the end.

Amit Debas - Analyst

Okay. Thank you.


(Operator Instructions) Your next question comes from theline of Gilda Battista.

Gilda Battista - Analyst

Good morning. I had a question regarding possible takeovers.Any offers in the future? Thank you.

Ajit Balakrishnan

Okay. There has been absolutely no offers received fromanybody, nor has there been an attempt to reach out to us to discuss a possibleoffer. As you probably know, we are very familiar with all the players in themarket at every level.

So, if there was any such rumor or intention, I'm prettycertain that people who head the large international portals would have noproblem in asking me directly. And I can categorically say that there has beenno discussion whatsoever in the last one year or so. Does that answer yourquestion?

Gilda Battista - Analyst

Yes. Thank you.


(Operator Instructions) Your next question comes from theline of Arun Bakshi, Volkswagen (ph).

Gaurav - Volkswagen

Good morning. This is Gaurav. I had a small questionregarding a possible IPO or listing in the Indian markets. Is it something onthe cards?

Ajit Balakrishnan

We've often been asked the question. I think that our answerhas been always the same, which is that as an Indian company there is no doubtthat one-day we will list in India. That's the intention.

Over 80% of our users are in India. But we have no specificplans, nor are we taking any specific steps towards it. I think according togovernment regulations we have plenty of time. I think there is no problem onthat.

So I think we're just concentrating on building our businessduring a period of intense competitive activity. And as management, we don'twant to be distracted by any of these things during this very crucial six-monthperiod. So the answer is no. We're not taking any steps towards that.

Gaurav - Volkswagen

Okay. Thank you and congratulations to the entire team andall the employees for a very good result. I think it's a nice one. Thanks.


Your next question comes from the line of Narendra.

Narendra - Analyst

Just one question on the competitive intensity. Youmentioned that the competitive intensity and activity has stepped up over thelast six to nine months. And it appears that large portals or sites like Googleand Yahoo have taken notice of India and they are reemphasizing on theirpresence over here.

Going forward, do you think that this competitive intensitywill now stabilize, or do you see this deteriorating over the next six to ninemonths?

Ajit Balakrishnan

Okay. Our competitors are of several different types. Yahoo,for example, has been in India for a very long time, 10, 12 years. So theycontinue at the same level of interest.

India is not new to them. They've been shuffling the CEOs,to make local CEOs make sure they get the right mix. So they continue at thesame level of high interest in India.

Google entered the market actively competing for ad revenuesabout two years ago. And they are formidable competitor, and I think they aredoing well in the pace for performance, which is where they compete with us.

They do not offer too much competition to us on the brandedadvertising piece, the graphic advertising piece. So, I think we've got used tothe competition in the last two years. The new entrant in the area is AOL.

AOL did not exist in India at all. So, they entered themarket in the last few months and they are trying to build their user base andpage views. They're still at a very early stage but they are putting quite abit of effort to promote their AOL Mail and related channels.

So, I think they are at an early stage as yet, they do notcompete significantly for revenue with us because their page views and uniqueusers are a very small fraction of ours at the moment. And the fourth player whoseems to have got renewed strength is MSN Live.

They've put together, as you know, internationally all thevarious properties of Hotmail and MSN and many others together. And they haveregrouped and increased the staff strength here. They at the moment we are notseeing a major impact of their renewed interest.

As I have pointed out Comscore Media Metrix has shown themdeclining in users as well as page views during this past quarter. But they'recertainly regrouping and adding a lot of local managers to attack. So, Ipresume we'll see some further effort on their side.

So these four players continue to be formidable, as youknow, that they have limitless or rather bottomless budgets. They attract verygood people to work for them. They have significant worldwide access totechnology from their parent companies.

So I think one should not underestimate the power of thesefour entities. But, apart from these there are a large number of players tryingto occupy niche positions who offer indirect competition to us. Many of themhave recently got funded over the last year or so by VCs.

Somebody said there are more VCs than websites in Indiaright now. There are large monies available in plenty so there are many newentrants in the social networking space. There are many new entrants in all thenew categories.

There are no new entrants in the mail, messenger, searcharea. But in the social networking area there are literally dozens of entities,some funded, many unfunded, who are trying to make a goal of it. I think all ofit benefits us to some extent because I think it drives the user interest inthe Internet as the whole.

Which is a good thing, mean while it also means that a lotof inventory will soon come online. And we're not quite sure what the impact ofthat on pricing for advertising will be but I think it is a period of intensecompetitive activity, something like the United States about three, four yearsago.

Narendra - Analyst

Okay. Thank you so much.


(Operator Instructions) You do have a follow-up questionfrom the line of Amit Debas.

Amit Debas - Analyst

Hi. Can you just comment on the growth of the U.S.publishing online revenue? And what kind of traction are you getting there?

Ajit Balakrishnan

You know the U.S. online component has remained prettystable this quarter. I think the big issue there is that our site is extremelypopular in the United States. But you must remember in the end most of theusers are Indians in the U.S. and that's a limited group.

Internet penetration is virtually 100% and we have a highreach among them. So the user base you cannot expect too much of a growth inthe user base, unlike India where the user base is growing 25% upwards in thewhole market year on year according to Comscore and others.

So, I think the challenge there is to think up newapplications, which make sense to U.S. based people of Indian origin. We areexperimenting with many but we have at this moment not found the one, whichwill give us the growth in page views, and user base that will result in higherrevenues.

We have not yet found this sweet spot. So, it tends to berelatively stable with a little up and a little down quarter to quarter.

Amit Debas - Analyst

Thank you. That answers my question.


(Operator Instructions) That brings us to the end of conference call for the second quarter ended September 30, 2007.Thank you for participating in this conference call.

Ajit Balakrishnan

Thank you.

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