Sify Technologies Limited (SIFY) CEO Kamal Nath on Q2 2019-2020 Results - Earnings Call Transcript

Oct. 18, 2019 4:32 PM ETSify Technologies Limited (SIFY)
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Sify Technologies Limited (NASDAQ:SIFY) Q2 2019-2020 Earnings Conference Call October 18, 2019 8:30 AM ET

Company Participants

Shiwei Yin - Grayling IR

Raju Vegesna - Chairman

Kamal Nath - CEO

M. P. Vijay Kumar - CFO

Conference Call Participants

Greg Burns - Sidoti & Company

Allen Klee - National Securities

Operator

Good day, ladies and gentlemen. And welcome to Sify Technologies Financial Results for Second Quarter Fiscal Year 2019-2020. All lines have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. [Operator Instructions]

At this time, it’s my pleasure to turn the floor over to your host, Shiwei Yin. Sir, the floor is yours.

Shiwei Yin

Thank you, Cathy. I'd like to extend a warm welcome to all of our participants on behalf of Sify Technologies Limited. I am joined on the call today by Raju Vegesna, Chairman; Kamal Nath, Chief Executive Officer; and M. P. Vijay Kumar, Chief Financial Officer of Sify Technologies.

Following our comments on the results, there will be an opportunity for questions. If you do not have a copy of our press release yet, please let us know and we’ll 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 corporate website.

Some of the financial measures referred to during this call and in the earnings release may contain non-GAAP measures. Sify's results for the year are according to the International Financial Reporting Standard, or IFRS and it will differ somewhat from the GAAP announcements made in previous years.

A presentation of the most directly comparable financial measures calculated and presented in accordance with GAAP and a reconciliation of such non-GAAP measures and of the differences between such non-GAAP measures and the most comparable financial measures calculated and presented in accordance with GAAP will be made available on 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, and are subject to risks and uncertainties that could cause actual results to differ materially from those described.

With respect to such forward-looking statements, the company seeks protections 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, Chairman of Sify Technologies Limited. Sir?

Raju Vegesna

Thank you, Shiwei. Good morning. And thank you for joining us on the call. With the adaption of the digital

technology across India, global enterprises and the domestic players, the market opportunity as we have quickly transitioned to the digital economy.

In this process, we saw that the strength of a local IT enablers who has the capability and local knowledge to execute. This is the opportunity in front of Sify today. Let me bring Kamal Nath, our CEO to expand on some of the business highlights for the past quarter. Kamal?

Kamal Nath

Thank you, Raju. We continue to see increasing cloud adoption in enterprises as well as government clients.

Our investment schemes and partnerships are attracting clients who are renewing their erstwhile on-prem outsourcing, people heavy contracts, and looking for a hybrid or multi-cloud flavored models.

We’re also able to bring in benefits to clients with our hyperscale network services, which enables cloud adoption. The true value of Sify’s ICT services is being unleashed in cloud transformation projects. I would like to expand on the business highlights and our growth drivers.

Segment wise revenue from Data Center Services on Cloud and Managed Services grew by 18% and 30% respectively, while those from Technology Integration Services and Application Integration Services fell by 32% and 3% respectively.

Revenue from telecom centric services grew by 16% over the same quarter last year. Segment wise revenue from data and managed services grew 15% while revenue from the voice business grew by 17%. Let me now expand about the growth drivers. The primary growth driver in the market continues to be cloud adoption led by digital initiatives and transformation.

This trend is triggering movement of workloads from on-premise data center to hyperscale public cloud and also private cloud in varied degrees, based on the digital objectives of the enterprises. This results in transformation of the traditional network architectures and transformation at the edge which connects the end user.

The need for digital services like analytics, data lakes, IoT et cetera shifting the balance to adoption of hyperscale public cloud versus private cloud. Collectively, these trends are generating opportunities for full-scale cloud, data center and network service providers with digital services keys.

Let me summarize the categories of customers who are signing up with Sify. Customers choosing Sify for migration of their on-premise data center to multi-cloud platforms like Cloudinfinit, AWS and Azure. They also entrusted Sify with management and security.

Customers choosing Sify as their data center hosting partner as they embrace hybrid cloud strategy. Customers choosing Sify as their digital services partners and also customers choosing Sify as their network transformation and management partner as they migrate to cloud-ready network.

A detailed list of all key wins is recorded in our press release now live on our website. Let me bring in Vijay, our CFO to elaborate on the financial highlights for the past quarter. Vijay?

M. P. Vijay Kumar

Thank you, Kamal. Good morning, everyone. I’m pleased to present the financial performance for the second quarter of financial year 2019-20. Revenue for the quarter was INR 5,807 million an increase of 5% over the same quarter last year. EBITDA for the quarter was INR 1,061 million an increase of 38% over the same quarter last year. Considering IFRS 16 leases adoption from April 1, 2019, the increase on a comparable basis is 24%.

Profit before tax for the quarter was INR 280 million, an increase of 11% over the same quarter last year.

Profit after tax for the quarter was INR 191 million, a decrease of 25% over the same quarter last year due to tax expense during the current quarter. Capital expenditure during the quarter was INR 983 million. Cash balance at the end of the quarter was INR 1,375 million. With the focus on digital transformation, enterprises are actively engaging for multiple ICT services for the operational benefits of our comprehensive suite of services.

We are seeing managed services on top of the data center and cloud as having the most traction among them. While we expand our capacity, both data center and network infrastructure, we continue to exercise prudence in our capital investments. This financial year, the increase in depreciation and interest is partly due to adoption of IFRS 16 which became applicable from 1st of April 2019 for leases in particular for operating leases and tax expense is due to the company being subject to income tax as the benefit of past losses has been in last year. I will now hand you over to our Chairman for his closing remarks. Chairman?

Raju Vegesna

Thank you, Vijay. Incoming multinational companies and Indian enterprises are seeing the benefit of alignment with Sify, owning to the breadth of services and the evidence of successful delivery so far. As we expand our services, we will continue to strengthen our current partnerships and for new ones. The pursuit is to be partner of choice for both enterprises and in the partner ecosystem. Thank you for joining us on the call. I will now hand over to the operator for the questions. Operator?

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. [Operator Instructions] And our first question comes from Greg Burns from Sidoti & Company. Go ahead, Greg.

Greg Burns

Good morning. So we've been seeing some headlines around a little bit of slowing growth in the Indian economy. I know the government just passed a major stimulus package. So I just wanted to get your view on your business. Are you seeing any impact from the slowdown on a macro level in India? How's the demand picture look like for Sify? Thank you.

Kamal Nath

Yes, Raju, I will take the question.

Raju Vegesna

Yes.

Kamal Nath

Yes, so Greg, this is a very interesting question. In fact, yes, there is a general feeling of a slowdown in the market, however enterprises and that's what I mentioned in my statement previously, that enterprises are looking for cloud-based models which are and people, people like model and with our construct of the business, and in fact, we are taking over contracts from the so called established players like IBM or DXCs or Wipro or HCL. I know in fact, quite a few of contracts we have moved away from them annuity contracts in a long-term, three to five years contract.

The slowdown in a way is helping us, I mean I didn't exactly wanted to sound negative about the slowdown, but I think there's a big opportunity for companies like Sify in the slowdown where we would be able to deliver on integrated solutions, and cost them the traditional IT services providers. So we look this as an opportunity.

Greg Burns

Great, thanks. And then maybe you’ve talked, I know you've talked in the past about having a vertical focus, and maybe you've been experimenting with some new billing models, pay as you go kind of IT service billing models, can you just talk about those initiatives, how maybe they differentiate you in the market and are you seeing that focus drive increased demand?

Kamal Nath

Yes, absolutely. In fact, there are some engagements, very active engagements which are going on the market in that particular model. And we are seeing very, very interesting trends like for example, in India, we have seen adoption of cloud and cloud-flavored models in the Insurance segment. But the Banking segment has been little shy of moving to cloud, but we are seeing in certain environments, certain workloads within the Banking segment. The banks are actively talking for moving to cloud. And now, there is a big opportunity for companies like us who are in data centers as well as in cloud and the relevant partnerships with the hyperscale providers.

So the amount of money on those banks, or the insurance companies are spending earlier in buying infrastructure, the moment it is moving to consumption based models, we are the front runner in those kind of products. And these are, and interestingly these are all multi-year annuity projects.

Greg Burns

Okay, great. Now looking at the data center business. Could you just give us an update on the number of data centers you currently operate, what the plans are in terms of bringing on additional capacity this year and how much of that capacity is already sold? Thanks.

Kamal Nath

Vijay, you want to take the question?

M. P. Vijay Kumar

Yes, Greg, Vijay Kumar here, Greg. We have about 10 facilities across the country predominantly in Mumbai, most of it is in Mumbai with the overall IT power capacity of 60 megawatt which is substantially sold. And we have limited inventory in couple of facilities. We are continuing to expand on our data center footprint which is happening presently in two of the existing facilities where we’re adding additional modules and we’re also in the process of evaluating the timing of commencement of Greenfield data center project on the land which we own. I don't want to sound forward-looking at this point of time, but we’re actively evaluating those in terms of timing of when we would like to commence that.

Greg Burns

When you say commence like break ground, building them or they are already built-in going live?

M. P. Vijay Kumar

Correct.

Greg Burns

Breaking ground?

M. P. Vijay Kumar

Yes.

Greg Burns

Okay, so when you look at the second half, are you bringing on new, do you have already built PCs that are coming online in the second half? I just wanted to kind of understand if we're adding capacity here in the second half?

M. P. Vijay Kumar

With again an element of caution regarding sounding forward-looking in respect of two of our existing data centers, we’re creating additional capacity, which is additional modules in the existing facilities. And in one of the towns, one of the cities, data center build which is in progress will go live in this quarter.

Greg Burns

Okay, perfect. And how much of the capacity in that new data center that's going to go live is already sold?

M. P. Vijay Kumar

Okay. The new IT power capacity which will get added over the next six months should be about five meg. And in terms of customer occupancy, it will happen in phases, they would subscribe.

Greg Burns

Okay. Okay and with the investments you're making on your data centers and your network, what do you expect CapEx to be for the full-year?

M. P. Vijay Kumar

The CapEx for the full-year based on our current plans should be close to about INR 350 crores, INR 3,500 million, which works to close to about INR 50 million to INR 60 million at the commit.

Greg Burns

INR 60 million, okay, perfect. Okay, now looking at your application integration services and your technology integration services. Those have been pretty volatile. I know you lost a large government customer in the application business. But how should we think about those two businesses in terms of growth? Are those still growth drivers? Are they going to become less meaningful going forward? How should we think about those two?

Kamal Nath

Yes, so Vijay I will take this question. So, Greg, so let me first cover the technology integration services business. As you know this is more of project based business. So, I mean so there will be revenue reflection either on the upward trend or downward trend or maybe neutral also. Based on the number of projects which are getting implemented during the quarter and which we’re able to recognize the revenue.

So this is suited to the technology integration services business. But the good news is that with our integrated data center services, network services, as well as in our managed services, we’re seeing a pretty good growth of this business, with respect to our business line. So this is about the technology integration services business, the application business obviously, as you’re aware like this online test was a big business for us, we lost that contract.

But at the same time, our other application services business portfolio, which are more cloud centric which are digital services centric, we have incubated lot of business lines, a lot of products we have introduced which are expected to drive the growth going forward. And we’re also I mean getting newer contracts may not be as big as that specific customers, but we expect our application business to grow in future.

Greg Burns

Okay, okay, thanks. Has there been any movement on the data privacy bill in India, any progress there?

Kamal Nath

So the data privacy is on in fact, if you recollect some of my earlier segments during this conversation, almost all the cloud providers, global cloud providers are setting up their infrastructure in India, right from Amazon, Microsoft, the latest one being Oracle and Google. So, on one hand, the government has given a mandate, the data has to, although I know there are conversations which happened that on this specific subject, but the cloud providers are not waiting for that, they're setting up, setting up their cloud infrastructure in India.

So, I think the data, the localization of data, data privacy, these are the issues which will have the growth of data center and the cloud business in India. I mean cloud business which is service from India.

Greg Burns

Okay, yes.

M. P. Vijay Kumar

The data privacy bill is yet to be enacted as a lot. However government has reiterated its commitment to bring it out as the legislation soon. So the draft bill was issued last year in between, we had the election. So that bill could not be taken up. And the government is continuing discussions with all the parties concerned to incorporate their suggestion and bring up that particular bill as a lawsuit.

Greg Burns

Okay, great. Thanks. And when you talk about all the large global cloud players setting up infrastructure in India, should we view that not as them coming in and competing with you but them coming in and utilizing your services more partnering with you?

Kamal Nath

Yes, in fact, they’re more of our partners than competition. In fact, we have data centers, which are at a very low latency with those customers with those hyperscale providers who are setting up their infrastructure in India. So it helps us to service our clients in terms of their hybrid cloud or multi-cloud adoption. In fact, in the coming days, you will see growth being triggered around our partnership with those hyperscale providers.

Greg Burns

Okay, all right. And then lastly, what was the total debt at the end of the quarter?

M. P. Vijay Kumar

Total term debt, total term debt was about $100 million.

Greg Burns

Okay, and does that include the bank overdraft?

M. P. Vijay Kumar

No bank draft is in addition to that, which will be about $40 million -- $35 million.

Greg Burns

$35 million, okay. And the tax rate going forward, what's a good tax rate to model the business at?

M. P. Vijay Kumar

So, the new tax rates with the government has announced comes with few riders in terms of availing some of the part, equivalent of AMT, which you have in U.S., we have in India what is called the minimum alternate tax credits which we have signed. So, we are evaluating as to the timing of when we should start using the benefit of the lower tax rate.

So, for the time being, we are in the tax rate, claiming the benefit of the part AMT equivalent MAT tax credits which we’re eligible.

Greg Burns

Okay, so I’m sorry I missed it. But what like, what is your effective tax rate now? And maybe I guess what could it go to once the new tax rates are implemented?

Raju Vegesna

The effective tax rate now is about 32% to 33%. And once the new tax bill is adopted, which probably could be next year or the following year. It depends on how the MAT credits get away. And that time the rates would be 25%.

Greg Burns

25%, okay, perfect. Thank you. That does it for me. Thanks.

Raju Vegesna

Thanks, Greg.

Operator

And our next question comes from Allen Klee from National Securities. Go ahead, Allen.

Allen Klee

Yes, hi. If I look at your SG&A and at the rate that it's been running at so far this fiscal year, it's at a lower rate than last year. Can you explain what's going on there? And if you think that's kind of the new run rate?

M. P. Vijay Kumar

Yes, the SG&A we had some one-time expenses in the previous period. What do you see in the current fiscal, and you can compare it with what happened in the quarter, previous quarter as well, it represents the run rate at the moment.

Allen Klee

Okay, thank you. And then, as you were talking about Tech Integration and App Integration segments. I wasn't sure that I understood the bottom line on the Tech Integration, where you mentioned it's project based and that there's some opportunities to grow but what is the conclusion there? Do we think that this is a segment that overall, we should expect over the 12 months longer-term periods to have growth to it or not?

Kamal Nath

Yes, overall, you can expect because we are, in fact, we have won some of very large deals as we speak. So, those projects are expected to be kind of executed and realization happening over the next six months.

Allen Klee

Okay. In terms of this is more of a commentary. I'm not sure if you can answer this but I think it would be very helpful if on all the quarters that it would be possible to get the revenue breakup by each segment in sub-segments. So I think it would be helpful for investors to try to understand the pieces a little bit better, I don't know if that's something you would consider?

M. P. Vijay Kumar

Good, Allen. We have been providing segment information as part of the half year financial report through our 6-K filing which will follow approximately about three to four weeks from now. So we do provide that segment information and we will evaluate your position in terms of whether we could considerate quarterly.

Allen Klee

Okay. And then could you talk a little on what you see on the Telecom services side as has been the longer-term drivers of both the data and the voice pieces?

M. P. Vijay Kumar

Kamal, would you like to comment?

Kamal Nath

Hello.

Allen Klee

Yes, Kamal, yes.

Kamal Nath

Can you please repeat the question? Can you please repeat the question?

Allen Klee

Yes basically on your telecom centric segment, I just wanted to what would you point to be kind of the growth drivers there that we should be thinking about?

Kamal Nath

Fine, so let me respond to this. Telecom services, if I bake the portfolio of our overall telecom services, we have our traditional MPLS and Internet services. And then we have the newest services like the network managed services, the network transformation services, the hyper-connect telecom services connecting various data centers as well as the hyperscale cloud. Plus on top of that, we do quite a few very large network integration projects, where the customers use our -- use our telecom infrastructure plus third-party infrastructure.

But we manage the entire project. So while the MPLS, MPLS is surrounded business, but we’re seeing a lot of traction around Sify’s overall integration services and managed services business, including hyperscale connectivity. So we can continue to grow that business in spite of the fact that on the traditional MPLS, there are some mobile operators who are expected to either way somebody of that from a mobile telephony perspective from our service provider perspective.

Allen Klee

Okay.

Kamal Nath

And we are growing on that business. So overall we’re continuously growing on that.

Allen Klee

Okay. And my last question just so I understood what I think I heard you say on the data center business, that you had a combined 60 megawatts today, you're going to be adding five megawatts in your fiscal second half on top of that, is that the way to think about?

Kamal Nath

You’re right, Allen.

Allen Klee

Okay, great. Thank you so much.

Operator

And at this time, I would like to turn it back to the management crew. Thank you.

Raju Vegesna

Thank you for everyone joining us on the call, and we're looking forward to interacting with you throughout the year. Have a good day.

Operator

Thank you. This does concludes our conference. You may disconnect your lines at this time and have a wonderful day.

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