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Rediff.com India Limited (NASDAQ:REDF)

F1Q13 Earnings Call

July 26, 2012 9:00 am ET

Executives

Mandar Narvekar – Investor Relations and Corporate Affairs

Ajit Balakrishnan – Chairman and Chief Executive Officer

Swasti Bhowmick – Chief Financial Officer

Operator

Good morning, ladies and gentlemen. I’m Sourodip Sarkarm, the moderator of this call. Thank you for standing by and welcome to the Rediff.com Conference Call. For the duration of the presentation, all participants’ line will be in listen-only mode. And we will have a Q&A session after the presentation.

I would like to now hand over conference to Mr. Mandar Narvekar. Over to you, sir.

Mandar Narvekar

Thank you, Sourodip. Good morning, everyone, and thank you for being with us to discuss Rediff.com’s financial results for the first quarter ended June 30, 2012. I would like to introduce you to the members of the management present on this call, who will take you through the highlights of the company’s performance.

We have with us Mr. Ajit Balakrishnan, Chairman and CEO; and Mr. Swasti Bhowmick, CFO. As mentioned earlier, all of you are currently on a listen-in mode only. This conference will last for about 20 minutes and then we will be glad to answer any questions that you may have. For your immediate reference, we have also posted the earnings release for the first fiscal quarter year ended June 30, 2012, dated today on our website at investor.rediff.com. You may also call me at our Indian office at 9122-61820000, 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 the conference call except for the historical information and discussions contained herein, statements may constitute forward-looking statements for the purpose of the safe harbor provision under the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as may, will, expect, believe, will continue, anticipate, estimate, intent, plan, contemplate, seek to, future, objective, goal, project, should, will perceive or similar terms, variations of those terms or the negatives of those terms.

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 the forward-looking statements. These risks and uncertainties include but are not limited to a slowdown in the economy 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 or future acquisitions, attracting, recruiting and retaining highly-skilled employees, technology, acceptance of new products or services, the development of broadband Internet and 3G networks in India, legal and regulatory policies, managing risks associated with the customer products and a widespread acceptance on the Internet.

Listeners should carefully review the risk factors and any other cautionary statements contained in our latest annual report on Form 20-F and other reports filed by Rediff.com with the U.S. Securities and Exchange Commission from time to time. These reports are available on the SEC website from the SEC offices in Washington DC and on request by emailing us at investor@rediff.co.in. Rediff.com and its subsidiaries may from time to time make additional written and oral forward-looking statements. Rediff.com and its subsidiaries do not undertake to update any forward-looking statements that may be made from time to time by Rediff.com or on its behalf.

I would now like to introduce Mr. Ajit Balakrishnan, our Chairman and CEO.

Ajit Balakrishnan

Good morning to everyone. It’s a pleasure to have you on the call and we appreciate your continued interest in our company. In the fiscal year first quarter 2012, India online advertising business was adversely affected because of continued weakness in the banking, financial services, insurance and consumer electronic segments, while we saw good traction in our online shopping segment with increased transaction volumes and improved margins. The interplay of these trends, and the effect of spending rupee vis-à-vis the U.S. dollar is reflected in our results, which show a decline compared to previous fiscal periods.

We like most others in the Indian online industry continued to feel the impact of the uncertainty in the global economy and spending in India continues to be tight particularly in the advertising market. 3G adoption has been slower to materialize than we expected, but there continues to be strong initiatives from operators and carriers to promote data driven mobile devices and services and to enhance India's broadband infrastructure investments in India's fibre-optic networks in particular are intensifying, and we're witnessing most evolve towards 4G services and long-term evolution technology. Many industries forecast over the several years remain bullish in India despite some of the near-term challenges we’re facing.

Onto our results and business overview, advertisers in India specifically in the banking, financial services, insurance, media and consumer electronics categories are facing challenging times and they’ve cut down their overall advertising spent. This has negatively impacted India advertising revenues, which declined in the 2012 first fiscal quarter by 28% on a quarter-on-quarter basis in dollar terms.

In addition to the lower spending by online advertisers, reduction in the value of the Rupee against the U.S dollar has resulted in a sudden decline in the Indian advertising revenues by 6%. So Sri will provide more information on this later.

Plans are increasing looking forward to innovative, interactive solutions to the marketing problems, rather than buying the cheapest online media inventory. As such we have continued to evolve making changes to our offerings and pricing models for some of our key market clients in the FMCG, Auto and Consumer Electronics sectors, in order to better suite their near-term marketing means. They have retained that sale force and over the coming quarters, we will roll out changes for all our clients, cross categories in 23 Indian cities we service.

We believe that the size of audience that can be reached cost effectively as compared to the audiences of other media, such as print, daily’s, magazines, television channels and even online verticals, along with the new packet solutions are strong differentiators for our business.

Based on initial feedback from advertising partners to whom we roll these changes out to. We believe that over the coming year we will be in balanced position to rent off say some of the weakness we’re experiencing in the advertising market.

With that said, there will be some near-term challenges, but we believe our diversified business model, coupled with prospects of long-term growth in India as broadband connectivity improves and the affordable pricing reach the masses will position us well for the future.

Moving on, the Indian Internet market has witnessed 135% year-on-year growth in the e-commerce category with $24 million unique visitors to e-commerce and deal sites in June 2012, compared to $10.7 million visitors in the same month last year as reported by comScore Media Metrix. The retailing market is expected to continue to grow, and this was reinforced recently in the India Goes Digital report published by Avendus Capital.

As I mentioned in the last conference call, Rediff being a finite e-commerce space in a disposition to benefit from the increased interest from consumers. In our online shopping business, we've taken a number of steps in the last two quarters. And this quarter ended June 30, 2012, we achieved a 28% increase in the number of vendors versus the previous quarter growing from 400 to 510 and the product range has increased 38% from 100,000 SKUs to 138,000 SKUs.

Our revenue had increased 32%, and the number of orders delivered had increase 20% Q-on-Q. The real challenge in the online shopping business, however, is maintaining a margin while growing revenues. Our margins have increased slightly from 11% in the previous quarter to 12% in the current quarter. While our online shopping revenue, which includes margin and shipping recovery has increased 138% compared to the first quarter last year.

We intend to focus our effort on further improving the discovery of products through our online shopping portal and see this as a source of growth for us in future years. Some of the recent enhancements we have made include providing better ranking of products and recommendations and fine-tuning results based on user actions. The Rediff portal provides an added advantage of retargeting users on other web services, based on the categories and products they have browsed on our online shopping service. This creates better search matching functionality and carries back to the Rediff offering. So not only we have also taken steps to improve merchants view of the activity on the Rediff shopping portal, by providing an enhanced rendered panel that enables quick corrective action in terms to updating catalogues with new products and offers in real time. Over the coming years, we shall update you on further developments on some of these activities.

During the first fiscal quarter, we continued to make good progress on our paid mail business, our local TV advertising service and our local deal service. Our local TV advertising service enables small merchants to create low cost TV ads of their own in MPEG-2 format and insert their ads on national TV channels at a city level, thus enabling merchants to reach their customers on national television, but being only for the cities they intend to target.

The service also have the added advantage of providing an easy to use media planning tool, which helps takeaway the cost of hiring a professional media planner. Our service is currently available on two national channels namely NDTV Good Times and Zoom, and in the local markets in Delhi, Bombay, Pune, Ahmedabad, Baroda, Surat, Mysore and Bangalore. In the next two to three quarters, we’ve planned to roll the services to six additional metropolitan areas including Indore, Nagpur, Jaipur, Chandigarh, Amritsar and Ludhiana.

It is worth noting that we’ve already incurred the bulk of capital expenditure to support this initiative. To that point, we are maintaining a tighter control on costs along with focus on reducing our daily sales outstanding. These measurers are showing early signs of improving our operation as reflected in our lower cash burn from operations this quarter.

Our strategy has not changed and I continue to believe Rediff will be one of the primary beneficiaries of the anticipated growth in India broadband and mobile expansion over the coming years.

Swasti Bhowmick, our CFO will now provide you with details of our financial performance.

Swasti Bhowmick

Thank you, Mr. Balakrishnan, and good morning to all. Overall revenues for the first fiscal quarter ended June 30, 2012 were $3.67 million, down 32% over the corresponding quarter last fiscal year. Within this, revenues from India were $2.79 million or 152 million rupees, a decrease of 37% or 23% in rupees terms over the corresponding quarter last fiscal year.

Total India revenues includes both online advertising revenues and fee based revenues, these totaled $1.86 million or 101 million rupees and $0.93 million or 50 million rupees respectively in the quarter ended June 30, 2012 and declined by 45% and 8% respectively over the corresponding quarter last fiscal year.

Within fee based revenues, revenues from online shopping including our local deal offering showed an increase of 109% in rupee terms and revenue from Mobile VAS declined by 49% being principally to strict enforcements of the Do Not Disturb policy laid down by TRAI in September 2011.

Revenues from our U.S. Publishing business were $0.88 million for the first quarter this fiscal year, a decrease of 9% versus the first quarter last fiscal year.

Mr. Balakrishnan touched upon the key drivers that both positively and negatively impacted our top line performance. I would reisolate that the declines in the media sector and foreign currency fluctuations are the primary factors that adversely impacted our top line.

Our gross margin for the quarter ended June 30, 2012 were 32% from straight to 43% for the same quarter last fiscal year. This change was mainly on account of the declining revenue as a large portion of our costs are relatively fixed in nature. As revenues ramp up we expect to see improvements in our gross profit margins accordingly. The cost savings initiative embarked upon by our management team have resulted in possibly 20% lower operating expenses in the quarter ended June 30, 2012, compared to the same quarter last year.

These expenses were $3.45 million in the quarter ended June 30, 2012 compared to $4.32 million for the same quarter last fiscal year. We calculate our operating expenses on a non-GAAP basis, and we direct you to our earnings release dated today, which sets out the reconciliation of non-GAAP operating expenses to operating expenses under GAAP.

Operating EBITDA showed a loss of $2.27 million for the quarter ended June 30, 2012, as compared to an operating EBITDA loss of $2.01 million for the corresponding quarter last year. As you are aware operating EBITDA is a non-GAAP financial measure and we direct you to our earnings release dated today, which sets out a reconciliation of operating EBITDA to net income.

Depreciation and amortization expenses decreased to $0.88 million for the quarter ended June 30, 2012, compared to $0.94 million for the same quarter last fiscal year. Interest income for the quarter decreased to $0.52 million as compared to $0.78 million for the quarter in the previous year.

Net loss for the quarter ended June 30, 2012 was $2.62 million as compared to a net loss of $2.30 million for the comparative quarter in the previous year. Net loss per ADS for the quarter was $0.095 as compared to a net loss for ADS of $0.084 for the same quarter last fiscal year.

Another important point to make is that our fiscal first quarter comparisons take into account a decrease of almost 22% in the value of the rupee against the U.S. dollar for the comparable fiscal first quarter period. This had a material impact on our financial results as reported under U.S. GAAP.

Our total cash and cash equivalents to that $21.06 million or in rupees terms 1,183 million as of June 30, 2012 as compared to $35.90 million or in rupees terms 1,605 million as of June 30, 2011.

Our cash burn for the quarter ended June 30, 2012 was 40% lower, compared to the average cash burn per quarter that we experienced over the preceding four quarters. We believe that our cash resources are sufficient to execute our strategy and that our balance sheet provides us with flexibility to do so.

As we look at the remainder of the current fiscal year with substantially new investments to be made by industry and by government, we are hopeful that our business will return to growth and we expect to reinvest cash on operations in part to continue to broaden the reach of Rediff throughout India.

This concludes our review of the results for the first quarter ended June 30, 2012. I would request Ms. Balakrishnan to sum up the call.

Ajit Balakrishnan

I’d like to thank you all again for joining us today and we appreciate your continued support. Over the past several years, we’ve invested in our business, we’ve taken an opportunistic approach in order to expand the Rediff brand through India and thereby for our service offerings, so that we’d be in a position to capitalize on the hundreds of millions of dollars that have been and continue to be invested in India’s infrastructure. Adoption has taken a bit longer than I – many of us anticipated, but we believe the long term potential for our company remains very much intact. We believe our balance sheet remains strong and we will continue to be opportunistic where at the same time managing our cost structure to weather near-term challenges. At this time, we’d like to open up the call for questions.

Question–and–Answer Session

Operator

(Operator Instructions)

Ajit Balakrishnan

Sourodip, if we don’t have any questions, I think we can conclude the call.

Operator

Not a problem sir. I think there is no further questions in the queue so far.

Ajit Balakrishnan

Thank you, very much for attending this call. And thanks a lot.

Operator

Thank you so much all the participants. With this we conclude the conference for today. Wish you all a great day ahead, you all can disconnect your line. Thank you so much.

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