Sify Ltd. Q4 2005 Earnings Conference Call Transcript (SIFY)

| About: Sify Technologies (SIFY)
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Sify Ltd. (NASDAQ:SIFY)

Q4 Earnings Conference Call

April 20th 2006 8:30 AM

Executives

R. Ramaraj, CEO

Durgesh Mehta, CFO

Analysts

George Mihalos, Gilford Securities

Sameet Sinha, Kauffman Brothers

Operator

Good morning and welcome to the Sify Limited conference call for the earning results for the fourth quarter and fiscal year ended 31 March, 2006. At this time our participants are on a listen only mode. A brief question/answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.

As a reminder this call is being recorded. I would like to introduce your host for the conference Ms. Schrip Neehan, Investor Relations for Sify Ltd. Thank you, you may now begin.

Presentation

Schrip Neehan

Thank you operator. I would like to extend a very warm welcome to all of our participants today on behalf of Sify Limited. I am joined on the call today by Mr. R. Ramaraj, Chief Executive Officer and Mr. Durgesh Mehta, Chief Financial Officer of Sify Limited. Following our comments on the results, there will be an opportunity for questions. If you do not have copy of our press release, please call the global consulting group at 646 284-9426 and we will have one sent to you. Alternatively, you may obtain a copy of the release at the Investors Information section of 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 Relations section of the Sify website.

Some of the financial measures referred to during this call and in the earnings release may include non-GAAP measures. A presentation of the most directly comparable financial measures calculated and presented in accordance with GAAP related and presented in accordance with GAAP in a reconciliation of such non-GAAP measures are the differences between such non-GAAP measures and the most comparable financial measures calculated and presented in accordance with GAAP are also available at Sify’s website.

Before we continue I would like to point out certain statements contained in the earnings release and on this conference call are forward looking statements rather than historical facts. They are subject to risk and uncertainties that could cause actual results to differ materially from those described. With respect to such forward looking statements the Company seeks protection afforded by the Private Securities Litigation Reform Act of 1995. These risks include a variety of factors including competitive developments and risks factors listed from time to time with the Company’s SEC reports and public relations. Those risks 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. R. Ramaraj, CEO of Sify. Mr. Ramaraj.

R. Ramaraj, CEO

Thank you. I would like to welcome everyone on the call once again and thank you for joining us. I will commence with a few opening remarks on our performance.

We are extremely pleased to report a net profit on the US GAAP of $470,000 for the fourth quarter with consistent growth across all our businesses. Our growth over the year was lead by new initiatives in our portal business whose revenues grew 74% over the previous year. We continue to lead the market for infrastructure married services and have established leadership among private players in the high speed internet access to the home segment. The iWay cyber café chain continues to grow. We have substantial leadership and we have over 1 million subscribers using the 3300 iWays cyber cafes across 153 cities in the last quarter. We are well positioned to continue growth across all our businesses in a nascent internet services market in India. We have cutting edge IP expertise and the active involvement of our majority stakeholders in accelerating our growth with international relationships and alliances.

I will now request Durgesh to take you through our financial performance for the last quarter and then I will come back with some highlights of the last quarter. Durgesh.

Durgesh Mehta, CFO

Thank you Ram. Hello everyone. As Ram announced, we achieved a net profit of $0.47 million for the quarter compared to a net loss of $2.51 million for the fourth quarter in the previous fiscal year. We achieved net profitability with revenues of $28.9 million for quarter ending March 31, 2006, a 24.5% higher than in the quarter ended 31st March, 2005. Our cash profit in adjusted EBIDITA terms for the quarter was $2.65 million an increase of $2.07 million compared to the same quarter last year. The fourth quarter performance results are after considering a significantly higher provision for doubtful debt amounting to $0.98 million after we had earned an intensive analysis of our receivables position. The provisions of doubtful debt was $0.31 million in the previous year and $0.4 million in fourth quarter of the previous financial year.

Sify’s net loss for the year was $3.35 million, a decrease of 52.4% compared to a net loss of $6.9 million for the previous fiscal year. We ended the year with a cash balance of $63 million after a capital expenditure of about $2.8 million during the fourth quarter and $13.6 million during the year. Further details are available to you in our press release.

I would like to add that we have consistently invested in growth in the belief that this will lead to revenue growth, market leadership and profitability and are now beginning to see the benefits of this strategy. The markets in India continue to hold great potential for growth as do our international services in infrastructure management and security space. It is our intention to continue to invest in growth to build the value for the Company and maximize stakeholder value.

Ram will now take you through some of the highlights of the quarter.

R. Ramaraj, CEO

Thanks Durgesh. I’d like to start with what we’ve been doing in our Portal business, especially on the broadband side. We launched Sifymax.inc, our fast breaking broadband portal in the first quarter of the year and have been quite successful in developing, leading the broadband content market with alliances and innovation. Sifymax was the exclusive broadband partner for reality shows such as Indian Idols, Business Baazinga, and Saanya Pop and has a strong focus on entertainment with song and dance videos from Bollywood, interviews with actors and directors from the film industry international and domestic music videos. The site also hosts 15 radio stations with the latest Bollywood list, latest chart busters, Indi pop and international in multiple languages.

Of those wanting to stay in touch with the markets and news valued offers, Sifymax now streams Business Channel CNBC and news channel CNNIBN Light to cover the stock market during the day and news and business roundups in the evening. With regard to sports, Sifymax has the life streaming rights for all the 7 one-day international Cricket matches that were recently played between India and England.

Lastly in addition to Sifymax’s very innovative video scorecard that continues to delight Cricket fans with instant replays of the highlights almost as soon as they happen.

We launched India’s first city centric website Banglore Live.in during the quarter with original Banglo centric video content, created exclusively for on-line audiences. The video focuses on city news, events, entertainment, lifestyle, commerce and politics. The site is seeing an enthusiastic response and we will follow with other cities and broadband sites. We will open up new opportunities for city centric retail advertising, sponsorship, advertisements of city specific jobs amongst many others.

While advancing City Mall and initiating offers such as the deal of the day, which are growing in popularity, we have also extended the reach of the Mall by enabling mobile commerce that allows GPR mobile users to show on City Mall using their mobile phone. Our intention is to seize the initiative in Portal space with our early entry and lead in developing broadband content as well as with our lead in providing content in Indian language.

Moving on to access, the highlights of our access initiatives in enhancing the consumer internet experience starts with our iWays chain; announcing broadband access to Indians from 3,300 iWays across 153 cities in the country. Going at the rate of 200 cafes in the last quarter, we added more than 2 new cafes per day to extend our dominant position in public internet access. We are now the largest high speed internet service provider amongst private players in India with our 183,000 subscribers. We also have the widest geographic express with services expanded to 91 cities across the country.

By leading the market in broadband internet content, public broadband internet access and broadband access to homes, we have moved forward in our objective of being able to influence the Indian consumers internet experience by focusing on broadband.

I would now like to highlight some key initiatives in our VPN manage infrastructure services, managed hosting and securities services. Our wireless broadband connectivity for the last (inaudible) has been a key competitive differentiator in winning contracts for VPN and connectivity services for large enterprises across the country. In addition to this, I’m glad to inform you that we now have an agreement with the incumbent telephone company Baratcenha the largest telephone company in the country to give us access to their wire-line links for the (inaudible). This further strengthens our competitive position in this space.

Our mesh net work consists of leased fiber optic lines from a number of telephone companies as well as other providers such as (inaudible) corporation, advanced fiber optics along the power line. This approach has given us wide spread reach which we were able to compete effectively in highly competitive markets. For example, we have gained some significant wins such as Bombaydine, which was formally with a competitor but they were unable to implement connectivity across B&C class towns. We also won contracts from Euraka Forbes for a 90 location network and from Clavell corporation for a 200 location network because of the reach and quality of our services. A special area of focus has been the small and medium enterprise segment which represents a large and growing market in India. Our strategy is to approach the market by verticals for focus. For example, stock broking in India is a rapidly growing segment. We have launched a basket of managed ASP services for the segment that includes hosted messaging, document management, hosting and digital securities services, a solution which keeps data on remote PCs secure.

As electronically signed documents and digital certificates are becoming increasingly important and in use for stock broking, we are providing these services to this segment. We intend to approach other verticals in the small and medium segment similarly by tailoring solutions according to the needs of the vertical. We extend our position in the hosting space, (inaudible) setting up a level 4 data center in Bangalore dedicated to the rising demand for hosting primary and disaster recovery data centers. This will be Sify’s third data center in the country, after Mumbai and Shenai and will strengthen our leadership position into an end to end infrastructure managed service.

We continue to win new accounts for our international remote infrastructure managed services with two new accounts signed recently. They are engaged in discussions with a number of other companies and should see the results of this market development in the near future.

In significant recognition of our leadership in VPN services, Gartner is comparing 6 VPN service providers rated us on top in every parameter and stated, and I quote, “Sify has the most extensive portfolio of managed service offerings that include managed fire wall, hosted email and management of desktop and desktop applications.”

This brings us to the end of the highlights that I wanted to share with you across businesses and I’ll now turn the call over to the operator for questions. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen we’ll now be conducting a question and answer session. We will take questions from institutional investors and outside analysts. If you would like to ask a question, please press star 1 on you telephone keypad, a confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. If you are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Our first question comes from George Mihalos with Gilford Securities.

George Mihalos

Good afternoon gentlemen. A couple of questions. To begin with, can you talk a little bit about your hiring plans for this fiscal year and what should we be modeling in terms of wage inflation as we go forward?

R. Ramaraj

George, part of our model has been that we leverage existing manpower over multiple businesses in terms of the technology and tools that we use. So unlike the software industry, increasing in dollars our revenues need not necessarily have a direct impact on manpower costs. So that is actually one of the significant differentiation between us and the IT companies. We have that as an advantage because of the tools that we use. We expect, therefore, to add manpower on a lower level than the increase in revenues, and expect maybe overall to add about 10-15% by the end of (nothing). The second part of your question George was in terms of inflation for salaries? This has been definitely a market that has seen I think disproportionate increases in salaries. We have been doing a balance year. What we’ve been doing is to good engineering colleges, taking fresh engineers and have been training them so that we have, therefore a balance of costs between fresh and experienced people. The average increase that we have been seeing in the industry is about 15% or so for similar industries like ours, (inaudible) telecom or related industries and I think we should be somewhere in that ballpark.

George Mihalos

And we should see this in the first quarter, right? That 15% increase over the March level?

R. Ramaraj

I’m not sure that you’ll see all of that 15% in the first quarter, you may see that maybe staggered definitely spread over the first and second quarter.

George Mihalos

Okay. Also, can you talk a little bit more about the portal business? Excluding the Refco JV, was that profitable in the quarter or do you continue to invest in advertising in new technologies and are sort of tapping the profitability near term?

R. Ramaraj

The portal business, we are focusing as you know on two areas, broadband and youth. We have, therefore, made investments for making sure that we have the relevant content aggregation. The single largest cost therefore is content in that business. We need to source that content from different people whether it’s voluable, music or other people who can rate this content. That is where we have been focusing on. The business currently is at a EBITDA level and continuing to grow at about – for the year was at 74% but on the fourth quarter it was actually a growth of about 86% of revenue from Q4 of last year.

So there is momentum in the business and we would like to invest in video and youth content.

George Mihalos

So okay, is it safe to say that those EBITDA margins will be relatively stable near term as you bring on additional content?

R. Ramaraj

Yes, that is right.

George Mihalos

Okay. And perhaps also in the past you provided a breakdown of your on-line revenues, on-line advertising e-commerce so on and so forth, mobile as well. Can you provide us with that? Maybe you’d let us know what percentage of on-line revenue is coming from Sifymax?

Durgesh Mehta

Sifymax in the total is of the total advertising on-line advertising, Sifymax has 35% of the revenues.

George Mihalos

Okay. And can you break down in terms of on-line advertising, mobile revenues, so on and so forth so we can get a better picture of where the revenue is coming from?

Durgesh Mehta

Advertising revenues was 79%, e-commerce was 12% and mobile was 9%.

George Mihalos

What do you think it will take to really jump start the mobile side of the business? Is it simply the fact that the mobile carriers are taking a disproportionate amount of revenue within the sharing arrangement? Or is there something else?

R. Ramaraj

Only that. It is so skewed in their favor and anything that we did, you know, they try and copy and keep those revenues. It is a structural issue at the moment, not an opportunity.

George Mihalos

Okay.

R. Ramaraj

Still structure changes and I think structure will change as mobile users find alternate ways. For example, we are trying to see how well the mobile user can have direct access to some of our content at the iWays using blue tube. So there are many things that we are now starting to experiment to see are there some clever ways that the iWays, that we could maybe bypass, but that has to be a structure (inaudible) for any on-line company to have better revenues.

George Mihalos

Okay. And is there any on-line user data or total number of advertisers that you can provide us as we try to compare that part of your business with other peers?

R. Ramaraj

122 for the quarter.

George Mihalos

122. Okay. And you had mentioned a sharp increase in the allowance for doubtful accounts relative to the corporate end of the business. Can you elaborate on that a little bit? What sort of caused it?

R. Ramaraj

I think it was more because many of the enterprises, for them also this was their fiscal year end and therefore sometime delayed it and in so paying by the 31st of March, will be paying it this quarter. We have a polity that is based on number of days we just make that provision. And since it was year ending for most Indian companies, I think it was just a question of paying out in this quarter rather than in the last, and we have made that provision on a conservative basis.

George Mihalos

Okay. So you’re just being prudent. There’s nothing there? There’s no real accounts that are extraordinarily late or anything like that?

R. Ramaraj

It’s just prudent.

George Mihalos

Okay and last question. Shares outstanding for the quarter?

R. Ramaraj

42 million, approximately.

George Mihalos

Okay. Thank you.

Operator

Once again, if you’d like to ask a question, please press star 1 on your telephone keypad.

Our next question is from Sameet Sinha with Kauffman Brothers

Sameet Sinha

Good afternoon gentlemen. A couple of questions. Could you talk about some of the tends in the enterprise services business? Most of the growth, do you see that as a result of new customer wins or high revenue per customer?

R. Ramaraj

We are seeing both. We had repeat business. The way we are looking at this is, focus on recurring revenue. And 70% of our recurring revenue comes from existing business. 66% I believe comes from the existing customer and 34% have come from new business.

Sameet Sinha

Okay. On the remote IT management services, you seem to have won two new contracts. Can you talk of some of your experiences in the international markets while you are marketing these solutions, how you are going about approaching companies and what sort of responses are you getting; lead times, etc.?

R. Ramaraj

Both Forester in our report last year had covered us amongst 14 companies internationally, we did (inaudible) leading conferences where CIO’s participate; and have introduced city ended services. We had a nice coverage in relevant technology magazines in the United States, talking about Sify’s remote management capabilities. We have direct sales force support in the West Coast and East Coast. We do telemarketing and telecalling from India. We have an agency that refines and gives us appointments to market the ways in which we have been reaching targeted audiences. So that is how to get to the customer. Existing customers in India have also been references to the international customers besides the international customers themselves being references to the new customers.

Our experience has been that we’ve been able to migrate customers to remote management once they are signed on in very quick time. Usually between 3-4
weeks but never exceeding 5-6 weeks. That experience of migrating peacefully without upsetting their existing services is something that has been appreciated by the customers and has actually acted on increased engagement with the customers plus these two new wins.

Sameet Sinha

Can you talk about lead times? You know when you approach the customer by the time they sign on?

R. Ramaraj

On an average it takes us about 12 weeks.

Sameet Sinha

12 weeks. Okay. On the access media side revenue growth seems to have trickled down; is this mostly from pricing pressures on the iWays or are we seeing continued pricing pressure on residential access as well?

R. Ramaraj

Actually this is because in the months of February and March it is exam times in India and that is why the number of kids coming into the iWays thinned out. We expect that with the exams over and holidays in this quarter that we should start seeing increases in revenue. It is not pricing pressure but just the fact that this was exam time for both colleges, engineering colleges and high school.

Sameet Sinha

How much of your revenues during the quarter came from voice over IP calling through your radio boots and iWays.

R. Ramaraj

7% of company’s revenues came from IP from these boots.

Sameet Sinha

Recently also started streaming the India/England Cricket matches. Can you talk about you experiences there, the benefits, the traffic to your portal as well as walk-in traffic to the iWays?

R. Ramaraj

Actually, one of the challenges that we have and we have these Cricket matches is that our traffic to the iWays usually goes down. But for the exam factor, other than that, during the Cricket matches we did not see a drop at the iWay because of the radio streaming that we had. Second is that at our offices, actually the traffic we had 11 servers that were fully occupied and we’re delivering high quality streaming. So all of them are busy. Service was up and excellent response.

On one day more than 400,00 clips were viewed. So the response to the stream has been very, very encouraging.

Sameet Sinha

I did hear that the quality of the streaming was very good, so that was a good effort. On the Sifymax side, since this is a new business for you, can you talk about some of the methods you’re using to market this and spread awareness among advertisers. And if you can also touch on the (inaudible) sell out rate for this quarter, and also in the core Sify.com side, how has the new rejuvenated site, what sort of attraction is it gaining amongst advertisers?

R. Ramaraj

Our page views are driven entirely through content. For us therefore when somebody comes to our site it is because they had wanted to see something and therefore it is driven by content, whether video or on Sify.com. That makes it, whether through the iWay, broadband at home or wherever they come through, they are therefore able to spend sometime on the site because it’s coming for content. We have been able therefore to get a disproportionate portion of advertising revenues compared to page views than some of our competitors have. So with fall over page views our advertising revenues are disproportionately higher. The Sifymax, the way we’ve been promoting it is at the iWays, that’s what comes up first. And therefore that is something that the youngsters like to see and then route through to the Bollywood site, the reality sites, all of that. Second part that we have been doing is that we’ve had a launch of Anglo Life using disc jockeys. We had a contest for these jockeys in Bangalore and gave away a Huey car and this Huey was given away to a young programmer. All of that created substantial hype and this was done at a very large stadium which was jam packed with these disc jockey and the rest.

Many ways in which youths hang out is where we have been promoting this and then finally the key in internet marketing as you know is vital marketing and it is really this vital marketing that has got us the traffic. On the Sify.com, the feedback on the new site has been excellent and the advertisers’ response therefore has also reflected in the increased revenues in this quarter.

Sameet Sinha

How are you marketing this to advertisers both ….

R. Ramaraj

Direct sales force located substantially in Mumbai and Delhi. They go out and make these pitches. Besides of course selling it to aggregators.

Sameet Sinha

And can you talk about what percentage of these relationships are directly with the advertiser versus through agencies?

R. Ramaraj

95% + would be direct.

Sameet Sinha

Okay. And one final question. What was your cash flow from operations during the quarter?

R. Ramaraj

It was about $200,000 after CapEx.

Sameet Sinha

Free cash flow was about $200,000 okay.

R. Ramaraj

After $2.8 million of capital.

Sameet Sinha

Okay, thank you very much.

Operator

Gentlemen, I’m showing no further questions in queue at this time. Do you have any closing comments/

R. Ramaraj

Thank you all for joining the call, and we look forward to interacting with you through the quarter and around this time in the next quarter. Thank you and goodbye.

Operator

This concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time.

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