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( followers) 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 Call declaring 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-answer session and instructions will follow at that time (Operator Instructions). As a reminder, this conference is being recorded.

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

Deb Saha

Thank you Michelle. Wish you all a very good morning and thank you for being with us to discuss's financials for the second quarter ended September 30, 2007. I would like to introduce you to the members of management present on this call, who will take you through the highlights of our Company's performance.

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

For your immediate and ready reference, we have also posted the earnings release for the second quarter ended September 30th, 2007 on our website at You may also call me 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, except for the historical information and discussions contained herein, statements may constitute forward-looking statements for the purposes of the Safe Harbor provisions 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 annual report on Form 20-F, filed by with the SEC. and its subsidiaries may from time to time make additional written and oral forward-looking statements, including statements contained in the Company's filings with the SEC and our reports to shareholders. 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 at

Now, I would now like to introduce Ajit Balakrishnan, our Chairman 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. The Indian 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 previous fiscal year.

The Indian PC market according to IDC, International Data Corporation, an independent market research company, grew 22% in terms of sales volume during the quarter ended June 2007 as compared to the same quarter last year.

The Indian mobile subscriber base according to the Telecom Regulatory Authority of India grew $209 million, grew to $209 million as of September 30, 2007, representing a 61% increase compared to the same date last year.

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

Our revenues totaled $7.1 million for the quarter ended September 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, advertising revenues totaled $4.26 million for the quarter ended September, an increase of 18% 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 fiscal year.

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

The following five industry categories accounted for 56% of our revenue. Consumer finance, employment, travel, matrimonial and insurance. For the quarter ended September 30, the top 10 advertisers contributed 45% of advertising 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 to our users. In executing this strategy, we continued adding new elements to our platform and enhancing current ones.

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

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

Our Consumer Finance channel, Moneywiz, was enhanced with Market Voices, a live running commentary during market hours. This commentary is updated every few minutes, during the trading hours in the Indian stock market.

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

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

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

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

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

Our page views during the quarter grew 49% over the previous quarter, while page view growth in the total Indian market was only 1%. Over the 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 our financial performance.

Joy Basu

Thank you, Ajit, and good morning to all. Overall revenues for 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 $5.73 million an increase of 22% over the corresponding quarter last fiscal year.

Revenues from our U.S. Publishing business were $2.13 million for the quarter, an increase of 9% over the same quarter last fiscal year. 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 fiscal year.

Gross margins increased to 82% for the quarter, compared to 80% for the prior-year quarter. Operating expenses during the quarter increased by 29% to $5.39 million compared to $4.19 million for the same quarter last fiscal year, primarily due to higher product development, bandwidth and general and administrative costs.

Operating EBITDA decreased marginally to $1.04 million for the 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 and we direct you to our press release dated today, which sets out the reconciliation of operating EBITDA to net income. Depreciation expenses increased to $1.46 million for the quarter compared to $0.60 million for the same 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 the conversion of cash deposits and other balances held in U.S. dollars into the company's functional currency, the Indian rupee, due to strengthening of the Indian rupee against the U.S. dollar. Net income for the quarter ended September 30, 2007 was $0.89 million as compared to a net income of $1.50 million for the comparable quarter last fiscal year.

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

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

Ajit Balakrishnan

Thank you, Joy. Here is a summary. Our registered user base grew 25% year on year. To maintain a leadership position, we continued investing in enhancement of our services. These include new features to our video sharing platform iShare and to our new Consumer Finance channel Moneywiz. We started beta testing our new search platform for Indian languages using advanced predictive technology. Key financial metrics for the quarter are as follows.

India Online revenues and U.S. publishing revenues grew 22% and 9% respectively. Increased overall company revenue for the quarter to $7.9 million, 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 per ADS. The latest report from comScore Media Metrix shows that our stepped-up expenditure on product development is probably starting to bear fruit.

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

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

Thank you very much and we now look forward to your questions.

Question-and-Answer Session


Thank you, Mr. Balakrishnan. We will now begin the question and answer session (Operator Instructions). Your first question comes from the line 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 that we've witnessed in the last quarter to become an annual pattern?

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

Ajit Balakrishnan

Ashish, you're perhaps referring to the slow start of the current 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 the financial year coincided with a number of new entrants and increased aggressive activity by Yahoo!, AOL and to some extent Google as well. So we don't believe that the kind of dip that we saw is likely to recur and it's unlikely that it'll recur. It will probably continue growing.

Ashish Thadani - Gilford Securities

Okay. That's helpful and then the second question is that depreciation and amortization continues to rise as a percentage of revenue, and you certainly spoke about this on the last call. But as a percentage of revenue, do you think that we can see some stabilization or a decline in the very 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 I call a lumpy increase. And the reason for that is that we talked about it last time too, but I think it's worth repeating. I think for many, many years our hosting services was really at one center with one ISP, which is VSNL.

Now, as the Indian telecom market has evolved, we have extended many of our servings, particularly our mail service, to two additional ISPs, Reliance as well as Bharti. Now, that has had a significant one-time capital expenditure associated with that. That continues, but much of it is lumped into this last quarter. So, I think that explains one of the reasons why the number jumped up a little bit.

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

Ashish Thadani - Gilford Securities

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

Ajit Balakrishnan

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

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

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

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

Ashish Thadani - Gilford Securities

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

Ajit Balakrishnan

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

And there is no deterioration in the current quarter as well, in the first month of this quarter. So, the price part is pretty okay. On the volume part is where the question marks arise. I think generally, on the volume side, I think the trend continues as healthy as last quarter. But we're not 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 has grown 18% year-over-year. How fast do you think the overall market had grown?

Ajit Balakrishnan

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

Here, as you know, they don't publish their results separately for India. So, we take it together from our side. My assessment is that 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 the same level. And all other players in the market are substantially smaller than us. 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 online fee revenues. As we know, it includes subscription, value-added services and online shopping. Now, which one of these has been growing faster than the others? And if you can just comment on each one of them?

Ajit Balakrishnan

I think, there are three pieces inside. We've not broken it down before. But I can tell you what the three pieces are. There is an online shopping piece, which, as you know, in India continues to be quite slow. There is growth, but there is not any substantial growth and it's held up essentially because 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 piece continues 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 have a leadership perception. Consumers see us as the one place to go to for a wide variety of ringtones. If my memory serves me correct, we have 60-odd or 50,000 to 70,000 ringtones to choose from. And many different surveys have indicated consumers see us as the leading player and what comes to mind when they need to search for ringtones.

So that part of the business grows. But as you probably know, the revenue share in India from the mobile operators is very adverse to the value-added service players like us. The weighted average margin, we get from things we do is probably 18% or 19%. Most markets in the world, it's upward of 50%. So, that continues to be a dampener. So that grows, but it is not anything substantial.

The third piece is the part where we provide domain names and corporate e-mail accounts. That has grown faster than the other two. I think, 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 is growing faster than the other two and driving virtually all the growth of that segment.

Amit Debas - Analyst

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

Ajit Balakrishnan

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

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

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

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

Amit Debas - Analyst

Okay. Thank you.


(Operator Instructions) Your next question comes from the line 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 from anybody, nor has there been an attempt to reach out to us to discuss a possible offer. As you probably know, we are very familiar with all the players in the market at every level.

So, if there was any such rumor or intention, I'm pretty certain that people who head the large international portals would have no problem in asking me directly. And I can categorically say that there has been no discussion whatsoever in the last one year or so. Does that answer your question?

Gilda Battista - Analyst

Yes. Thank you.


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

Gaurav - Volkswagen

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

Ajit Balakrishnan

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

Over 80% of our users are in India. But we have no specific plans, nor are we taking any specific steps towards it. I think according to government regulations we have plenty of time. I think there is no problem on that.

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

Gaurav - Volkswagen

Okay. Thank you and congratulations to the entire team and all 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. You mentioned that the competitive intensity and activity has stepped up over the last six to nine months. And it appears that large portals or sites like Google and Yahoo have taken notice of India and they are reemphasizing on their presence over here.

Going forward, do you think that this competitive intensity will now stabilize, or do you see this deteriorating over the next six to nine months?

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 they continue 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 the same level of high interest in India.

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

They do not offer too much competition to us on the branded advertising piece, the graphic advertising piece. So, I think we've got used to the 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 the market in the last few months and they are trying to build their user base and page views. They're still at a very early stage but they are putting quite a bit of effort to promote their AOL Mail and related channels.

So, I think they are at an early stage as yet, they do not compete significantly for revenue with us because their page views and unique users are a very small fraction of ours at the moment. And the fourth player who seems to have got renewed strength is MSN Live.

They've put together, as you know, internationally all the various properties of Hotmail and MSN and many others together. And they have regrouped and increased the staff strength here. They at the moment we are not seeing a major impact of their renewed interest.

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

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

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

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

There are no new entrants in the mail, messenger, search area. 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 of it benefits us to some extent because I think it drives the user interest in the Internet as the whole.

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

Narendra - Analyst

Okay. Thank you so much.


(Operator Instructions) You do have a follow-up question from 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 pretty stable this quarter. I think the big issue there is that our site is extremely popular in the United States. But you must remember in the end most of the users are Indians in the U.S. and that's a limited group.

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

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

We have not yet found this sweet spot. So, it tends to be relatively 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 the 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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