Satyam F3Q05 (Qtr Ending Dec 31, 2005) Earnings Conference Call Transcript (SAY)

Satyam Computer Services Ltd. (SAY)
Q3 2005-06 Earnings Conference Call
January 20th 2006, 8:00 AM.

Executives:

Srinivas, Chief Financial Officer, Director of Satyam-GE Software Services Private Limited, and Director of Nipuna of Sify Limited
Rama Raju, CEO, Managing Director, Director, Member of Investors Grievance Committee of Nipuna

Analysts:

Mahesh Vaze, BRICS Securities
Pramod Gupta, HSBC Securities
Mitali Ghosh, DSP Merrill Lynch
Anantha Narayan, JM Morgan Stanley
Pankaj Kapoor, ABN AMRO
Hitesh Trivedi, Edelweiss Securities
Mayank Tandon, Janney Montgomery Scott
Rod Bourgeois, Sanford C. Bernstein
Julio Quinteros, Goldman Sachs
Pratik Gupta, Citigroup
Rama Rao, RR Capital Management
(Indiscernible), JP Morgan
Ashish Thadani, Gilford Securities
Mike Stein, Thames River Capital
Anthony Miller, Arete Research
Divya, Motilal Oswal
Shekhar Singh, ICICI Securities
Sameer Goyal, Anand Rathi Securities
Ruchit Mehta, Ask Raymond James
Ashwin, (indiscernible)

Presentation

Operator

Good evening ladies and gentlemen. I am Prathiba the moderator for this conference. Welcome to the Satyam Conference Call. For the duration of the presentation, all participants’ lines will be in the listen-only mode. After the presentation, the question-answer session will be conducted for participants connected to the India Bridge followed by a question answer session for participants connected to the International Bridge. I would now like to hand over the call to the Satyam management. Thank you, and over to Satyam.

Srinivas, Chief Financial Officer, Director of Satyam-GE Software Services Private Limited, and Director of Nipuna of Sify Limited

Thank you, Prarthiba. Good morning and, good evening to you all and thank you for joining us to discuss out third quarter results. Joining me on this call, are Raju and Ram from Satyam, and Venkatesh from Nipuna. Before we start the discussion; I would like to draw your attention to the fact that during this call, we will make certain forward-looking statements containing our future growth prospects, such statements involve a number of risks and certainties associated with our business. Please refer to our various periodic filings with SEC for a description of such risks. The company does not undertake to update the forward-looking statement that will be made from time-to-time by or on behalf of the company. I now hand over the session to Raju.

Rama Raju, CEO, Managing Director, Director, Member of Investors Grievance Committee of Nipuna

Thank you, Srinivas. Hello everybody. Thank you for joining us on the call today. I am pleased to report that our performance in Q3 exceeded the guidance. As per Indian GAAP Consolidated Financials the company reported a revenue of Rs. 1265.3 crore, a sequential growth of 9.6%. A noteworthy feature of Q3 performance was the 13.2% sequential increase in earnings, as per, per share on the back of expansion in operating margins for the second successive quarter. As per US GAAP, the company recorded a revenue of US$281.8 million, and an earnings per ADS representing a sequential growth of 5.2% and 9.7% respectively.

Q3 witnessed 35 customer editions the highest ever in a quarter. These include 6 fortune global and US 500 companies. The growth in relatively younger verticals was very heartening in Q3 and is indicative of our expanding footprints in these areas. Our strategy to broad-base the growth has resulted in increased number of customers with annual run rate of more than $1 million, $5 million and $10 million. As regards the macro environment there is continued confidence shown by customers in entrusting us with more opportunities to enhance business value. This is leading to increasing instances of consulting led engagement, that demand greater level of accountability and ownership for delivering business solutions. Customers are increasingly looking for globally diverse site and integrated solutions which are creating opportunities for us to partner with them across multiple geographies.

Our European and Asia-Pacific business is benefiting from this trend in addition to increasing penetration in the core market. Another key aspect of offshoring trend has been the increasing acceptance of Indian vendors in large multi-million dollar and multi-year contracts. Such deals require significant investments in terms of resources and the main competence. Satyam has increasingly competing in a number of such deals and is well positioned to capitalize on this trend. We are revising our annual guidance of course in light of continued positive momentum, and better than expected performance for the first 3 quarters of the current fiscal.

We now expect revenue as per consolidating Indian GAAP financials to be between Rs. 4780 crore and Rs. 4786 crore, implying an annual growth rate of 35.7% to 35.9%. Earnings per share for fiscal 2006 is expected to be between Rs. 30.31 and Rs. 30.36 implying a growth rate of 35.3% to 35.6%. Nipuna our 100% subsidiary reported revenue of Rs. 22.1 crore a sequential growth rate of 21.2%. The revenue guidance for the full year continues to be at US$18 million. Inline with Satyam stated objective to emerge as pure play IT Services and Solutions Company and to unlock the value of our investment, we diverted our demanding stake in Sify for a consideration of $63 million in Q3.

Our investment in Sify has generated significant value for our shareholders in Sify inception. The initial investment in Sify multiplied 23 times over a period of 10 years, I would like to place on the card our appreciation for the contribution of Sify’s management in building a world-class organization in ISD space.

I now request Srinivas to discuss the financial highlights for Q3.

V. Srinivas, Chief Financial Officer

Thank you, Raju. Our detailed financials have been posted on the website, and I assume that most of you would have got an opportunity to go through the same. However, I will share some highlights of our Q3 performance. The highlight of the quarter has Raju as mentioned is a 15% sequential growth in EPS, to Rs. 8.36, under consolidated Indian GAAP basis. This was driven by a sequential revenue growth of 9.55%, and the 93 basis point improvements in margins on a consolidated basis. We expect margin improvement to happen in Q4, and on a year-on-year basis, we stick to our earlier guidance of decline in margin, consolidated margin of less than 50 basis points. The parent company saw a 6.5%growth in volume while the building rates increased marginally compared to previous quarter.

Next manpower edition for the parent company was 950 including 690 freshers. We effect the net manpower edition for the year to be between 5,500 to 6,000. Parent’s company’s cash and bank balances increased by US$33 million during the quarter, this includes $US 16 million, net of tax and fields on sale of our entire stake in Sify, and an outflow of 13 million towards CapEx. We estimate that the CapEx for FY’06 would be around 50 to 55 million.

Nipuna expected to achieve revenues of US$18 million in FY’06 and they’re expected to cash breakeven in Q4. Turning to US GAAP, for Q3, revenue under US GAAP towards the US$281.84 million a sequential increase of 5.23%, basic earnings per ADS for the quarter was 36% almost to our guidance of $0.34. Thank you, and I now throw open the session for Q&A.

Questions & Answers

Operator

Thank you, very much sir. We will now begin the Q&A interactive session for participants connected to WebEx India. The participants who wish to ask question, may please press “* 1