Sify Technologies Limited
Q3 2021 Earnings Call Transcript

Published: 28 Jan 2021

[Operator:]

Good day, ladies and gentlemen, and welcome to the Sify Technologies' Financial Results for Third Quarter and Fiscal Year 2020 to 2021. It is now my pleasure to turn the floor over to your host, Shiwei Yin. Sir, the floor is yours.

[Shiwei Yin:]

Thank you, Kate. I would like to extend a warm welcome to all of our participants on behalf of Sify Technologies Limited. I'm 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 their comments on the results, there will be an opportunity for questions. If you don’t have a copy of our press release, please let us know and we will have one sent to you. Alternatively, you may obtain a copy of the release on the Investor Information section of the company's corporate website at www.sifycorp.com.

[Raju Vegesna:]

Thank you, Shiwei. Good morning everyone. Wish you and your family a very healthy and happy New Year. Thank you for joining us on the call. The pandemic has been an inflection point in the way we do business. As the world rallies to find a cure, businesses and people demonstrated resilience and adaptability. Our strides are rediscovering that disruptive nature of artificial intelligence, distance learning, telemedicine, robotic process and automation. And these should be long-term trends that are increasingly becoming accepted as a mainstream technology. These trends continue to stimulate demand for our data center, and our network capacity and the services around our Data Center centric and Network Centric businesses segment that Sify stays firmly committed to. So now I will ask our CEO, Kamal Nath to expand some of our business highlights for the past quarter. Kamal?

[Kamal Nath:]

Thank you, Raju. In continuation of science seen in earlier quarters, we have seen an aggression in customers' decision-making and spend in areas of digitalization, business continuity plan, security and remote working models. They are also allocating budgets for financial year 2021-2122 along these lines. Overall, we are excited by this trend, a lot of products, services, and business models are in complete alignment with the customers’ priorities. I would now like to expand on the business highlights and our growth drivers. Revenue from Data Center centric IT Services grew 21% against the same quarter last year. Segment-wise, revenue from Data Center Services, Cloud and Managed Services and Technology Integration Services, grew 46%, 26% and 13% respectively, while revenue from Applications Integration Services fell by 21%. Revenue from Network Centric Services fell by 5% over the same quarter last year. Segment-wise, revenue from Data Connectivity Services grew 5% while revenue from the Voice business fell by 32%. Let me now expand upon the growth drivers. The pandemic has accelerated the primary growth drivers in the market for cloud adoption, led by digital initiatives and transformation. This trend is triggering movement of workloads from on-premise data centers to hyper-scale public cloud and hosted private cloud in varying degrees, based on the digital objectives of the enterprises. This results in a transformation of the traditional network architecture and transformation at the edge which connects the end-user. The need for digital services like analytics, data lakes, IoT, et cetera is shifting the balance toward the adoption of hybrid and public cloud versus private cloud. Collectively, these trends are generating opportunities for full-scale cloud, data center, and network service providers with digital services skills. 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, Azure, and Oracle. They also entrusted Sify with management and security. Customers choosing Sify as their data center hosting partner as they embrace hybrid cloud strategy. And customers choosing Sify as their multi-service digital transformation partner and also customers choosing Sify as their network transformation and management partner as they migrate to cloud-ready network. A detailed list of our key wins is recorded in our press release, now live on our website. Let me bring in Vijay, our CFO, who will elaborate on the financial highlights for the past quarter. Vijay?

[M. P. Vijay Kumar:]

Thank you, Kamal. Good morning, everyone. Allow me to sum up the financial performance for the third quarter of financial year 2020-2021. Revenue for the quarter was INR 6,301 million, a growth of 7% over the same quarter last year. EBITDA for the quarter was INR 1,291 million, an increase of 17% over the same quarter last year. Profit before tax for the quarter was INR 400 million, an increase of 51% over the same quarter last year. Profit after tax for the quarter was INR 252 million, an increase of 54% over the same quarter last year. Capital expenditure during the quarter was INR 1,140 million. Our data center and network expansion plans remain on track. We will continue to invest in people and tools while maintaining a tight fiscal discipline. Our discretionary spend will remain contained in the short run, without impacting the overall customer experience. Cash balance at end of the quarter was INR 4,431 million. I will now hand over to our Chairman for his closing remarks. Chairman?

[Raju Vegesna:]

Thank you. Thank you, Vijay. India is in the middle of the largest vaccination drive globally. The proactiveness in early stage now vaccinating and it's slowly bringing back the confident into the market. Businesses that aggressively adopting technology to bridge customer gaps, which in turn built a large demand for digital transformation services. At Sify, our unique position – proposition of being convert ICT player offering all the services, being at the data centers, network or a data center centric or a network centric services has placed us in the right place at the right time. In time, we should unlock the full potential of all our services. Thank you for joining us on this call. I will now hand over to the operator for any questions. Operator?

[Operator:]

Thank you. Our first question today is coming from Greg Burns. Please announce your affiliation and then pose your question.

[Greg Burns:]

Good morning. It's Greg Burns from Sidoti & Company. Can you just give us an update on your current data center footprint? What the utilization rates look like and then prospectively, what the plans are for adding capacity to that? Thank you.

[Kamal Nath:]

Vijay?

[M. P. Vijay Kumar:]

As far as our existing data centers are concerned, we have 10 data centers spread across six cities with an overall operational IT power capacity of 71 megawatt of which we have contracted over 90% of the capacity. We are currently looking at adding new capacities as greenfield data center projects. I don’t want to sound forward looking at this point in time. But given the market opportunities, which are there, we are timing our capacity creation to meet the market demands by expanding the data center footprint in three cities, Mumbai, Noida, and Chennai.

[Greg Burns:]

Okay. And then typically did you freeze all capacity how does it work your adding capacity. I'm assuming some pre-selling going on. So how does that typically work?

[M. P. Vijay Kumar:]

Sorry, Greg. The voice was cracking for me.

[Kamal Nath:]

Greg, some of these things, yes, I know we are working, there are potential – hyperscalers potential for Indian market is available and based on that only we are building in these three cities what is Vijay outlined in our Mumbai; and NCR, National Capital Region, New Delhi area; and in Chennai, we are committed to build up more data centers.

[Greg Burns:]

Okay. And I guess, given these plans, just an idea of what you expect CapEx to be over the next 12 months?

[M. P. Vijay Kumar:]

For the next 12 months, we would have a capital expenditure requirement of approximately 4,000 million INR terms.

[Greg Burns:]

Okay. Thank you. And you mentioned the cash balance, what was your total debt balance at the end of the quarter?

[M. P. Vijay Kumar:]

Our total debt balance in INR terms is 9,000 million approximately.

[Greg Burns:]

Okay. Thanks. And you mentioned, it seems like and for your services covering from the part of the pandemic, can you maybe just give us your view on what differentiates customers’ businesses and entities might turn to Sify over maybe another competitor in the market?

[M. P. Vijay Kumar:]

Kamal, do you want to add there?

[Kamal Nath:]

Yes. Sure. Sure. So, thank you. Thank you for asking this question. Sify is in a very unique position, because Sify has got all the right assets to move the customer from the older model of IT to the new model of cloud-based IT. So, our investments like data center, our own cloud, our partnership with hyperscale cloud providers, and on top of that, very significantly, our network investments. These are all required to move the customers IT from the old model to the new model. So, there are very few customers, very few competitions who has got all the different assets with them. And over and above our own services capabilities of stuff like migration services, managed services, security services, because when they have to run into a new scheme of things, all these assistance services are required. I think that way we are significantly and uniquely position, as against our traditional competition individually in the data center space or individually in the cloud space or individually in the network space.

[Greg Burns:]

Okay. And what are you seeing? Okay. I guess, what are you hearing or seeing on the ground and talking to your customers, or is your project pipeline increasing like what's the demand outlook here going forward, and you've seen a noticeable improvement since the beginning of the pandemic?

[Kamal Nath:]

Can you please repeat your question? Actually, I'm not sure why your voice is breaking or is it, Vijay are you able to hear him?

[Greg Burns:]

Sorry, I can repeat it. I'm just asking you about your project pipeline. What kind of demand you're seeing from your customers?

[Kamal Nath:]

I think Greg, pipeline looking promising. We cannot give the details of the forecast, but the trend is positive, Greg.

[Greg Burns:]

Okay, great. And then lastly, could you just remind us why the Application Integration Services is down? What's the primary drivers behind that?

[Kamal Nath:]

Vijay?

[M. P. Vijay Kumar:]

Sorry, voice is cracking for me, it’s like I heard something…

[Kamal Nath:]

I heard something why our Application Services business going down?

[Raju Vegesna:]

Voice was cracking.

[Greg Burns:]

Yes, so what's driving the decline in application integrations services?

[Raju Vegesna:]

Okay, Kamal would you like to respond on that, what is contributing to decline in application integrations services?

[Kamal Nath:]

Yes, it has predominantly because of dropping in the Talent Management business. I think it is predominantly because of that. So, I mean, there's not a reason. But yes, our application businesses are also – the cloud aligned application businesses has increased, but however, they sound traditional, line items like Talent Management, but because of bigger – asked while bigger volume that's why you can see a negative growth in the application services.

[Greg Burns:]

Okay, great. Thank you.

[Kamal Nath:]

Yes.

[Operator:]

Thank you. Our next question today is coming from Jonathan Atkin. Please announce your affiliation, then pose your question.

[Jonathan Atkin:]

Yes, Jonathan Atkin from RBC Capital Markets. Couple of questions about international demand into India and your press release mentions companies like Microsoft, and AWS, and Oracle, and I wondered what are the trends that you are expecting overall for the Indian data center sector in terms of these hyperscalers growing their presence in India? Is it going to be through third-party data center providers, or are they going to be building their own sites? How do you see that playing out over the coming several quarters?

[Raju Vegesna:]

Hi Jonathan, this is Raju. So, India is a growth story for all the hyperscalers. I cannot name individually. And we are working with every hyperscaler on there and every hyperscaler wants to come to India and they are growing. So, one is they are going to look at it in a different model either they are going to look at in a build-to-suit certain hyperscalers. Certain hyperscalers are looking at a co-lo model. So, they are contemplating depending upon what are the opportunities they are looking at. So, there is an opportunity for data center providers like us to provide hyperscalers. And it's very promising for the hyperscalers market in India.

[Jonathan Atkin:]

So, I have a couple of follow-ups. So, since, I think, the last time we chatted, at least in this forum, Equinix has announced the acquisition of GPX; Digital Realty has entered into an MoU with a local party. And given the interest level in this case, U.S. companies, making investments in India, or at least planning growth strategies, does that have any kind of strategic implications for the Indian-based operators such as yourself?

[Raju Vegesna:]

See, I think, there are entities like foreign operators that are coming, but also there is a lot of Indian operators that are going. So, if you look at Jonathan the IT penetration in India is very small. So, the way I always give analogs how the mobile took off in India, similarly, I believe, the cloud will take off in India, either hyperscaler in a public cloud or a private cloud, or a hybrid. So, I believe, hybrid is a way to go, people will not bet everything on hyperscaler. I think it will be a great growth story for a cloud platform, the way the mobile took off. I think the way if you look at it, the kind of markets you look at the retail, and healthcare, and education, all those things, how it's going online, and you are going to see tremendous demand for both data centers at the same time, the network. So, it's not just only the data centers because, data centers without a proper network also it's going to be a bottleneck. So that is the reason we have – we are in a unique position. And there will be a couple of other people, but Sify is in a very good position having leg in both the sides, both in the data centers, and the network.

[Jonathan Atkin:]

So that actually leads to my last question. So, given the integrated services and solutions that you are able to offer, how do you, think about the optimal revenue mix going forward? The CapEx number that you shared, a lot of that goes into building new inventory, and one could theoretically do a small number of very large deals for large customers, but perhaps with fewer services attached. But that moves the needle on revenues in a significant way, or one can choose to fill it with maybe smaller enterprise and with more of a multifaceted solution, perhaps that's higher yielding. How do you balance the two in general?

[Raju Vegesna:]

No, I think, that's a very good question. But it's a balancing act, right? So, the way we have is Data Center, and we have a network and we have IT Services, right? So, Data Center requires lot of CapEx we have to build, right. And also, when we are building these data centers, we don't need to invest everything in upfront. You build it in a modular approach, right. And so that is one way, you will reduce putting money on the upfront. Similarly, in the Network, then after the Data Center is probably Network business requires lot of CapEx, we are to build our metro network, maybe some NLE network and a cable landing stations, those kinds of things, too. We are not a mobile operator. We are same customer base where our OTT players and our hyperscales required a lot of the network. We are going to work with the same partners to enable our network business. And similarly, based on that network we are going to enable our enterprise market where we have a lot of customers servicing for our BFSI sector, manufacturing and retail customers. The third one is our IT services, which doesn't need much CapEx. And that is more of skilled manpower and that doesn't need more CapEx. So, if I want to ratio probably, 70% to 80% goes, our CapEx, into the Data Centers; probably about 20% to 30% goes into the Network; and maybe 5% goes into the IT Services. That's the way I look at what we are going to spend on the CapEx.

[Jonathan Atkin:]

Thank you very much.

[Raju Vegesna:]

Thank you, Jonathan.

[Operator:]

Thank you. We have no further questions in queue at this time. Do you have any closing remarks you would like to finish with?

[Raju Vegesna:]

Thank you everyone for joining us on this call. And we look forward to interacting with you through the year. Stay safe, stay healthy and have a better year ahead. Thank you.

[Operator:]

Thank you, ladies and gentlemen. This does conclude today's call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.