Sify Technologies Limited
Q4 2017 Earnings Call Transcript

Published: 24 Apr 2018

[Operator:]

Greetings and welcome to the Sify Technologies Financial Results for Fourth Quarter and Fiscal Year 2017-2018. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Shiwei Yin, from Grayling. Thank you. You may begin.

[Shiwei Yin:]

Thank you, Michelle. I would like to extend a warm welcome to all of our participants on behalf of Sify Technologies. 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 our comments on the results, there will be an opportunity for questions. 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 Web site. Some of the financial measures referred to during this call and in the earnings release may include non-GAAP measures. Sify's results for the year are according to the International Financial Reporting Standards 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 Web site. 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 the 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. Raju?

[Raju Vegesna:]

Thank you, Shiwei. Good morning everyone. Thank you for joining us on this call. I'm pleased to note that Sify has [ph] emerging as a competitive ICT service provider for both Indian enterprises and the multinational companies coming into India. This points to our maturity of the service portfolios, its flexibility, and the strong fit to the unique challenges of the Indian market. As India is doing a digital transformation, both by the public sector and the private enterprises, that continues to fuel new opportunities for Sify across the board. Let me bring Kamal, our CEO, to expand our business performance for the past year. Kamal?

[Kamal Nath:]

Yes, thank you, Raju. We have continued our growth in revenue and profitability on new order book based on our growth in datacenter-centric IT services, as well as ICT transformation services. We have been able to establish ourselves as a credible partner for our clients in consumption as well as bill [ph] model of IT and communication services. We would continue to expand our portfolio around cloud as the core theme across all our business lines. We believe our next level of growth will be centered around the growth of our cloud at the core service lines. Let me spend the next couple of minutes elaborating on our business highlights. I will start with our telecom-centric services. The revenue for the data and managed services business for the year FY '17-'18 grew by 9% over the previous year, while reduction in revenue from India voice termination [ph] due to reduction in IUC charges resulted in the overall telecom revenue falling by 2% over the last year. Sify added a total of 803 new telecom services customers during the year. The last quarter of the year saw a major and strategic network transmission win in the financial services vertical. Sify won a contract on network services in Nepal, which is the first in the geography and opens up the potential to cater to the SAARC countries sharing a border with India. Sify's hyperscale network strategy continues to see success with a terabit scale solution for a large global content player and repeat orders from existing cloud and CDN providers. Sify also secured contracts for managed WiFi and security services across FSI, manufacturing, and ITeS verticals. We have also successfully incubated a service bond for Internet of Things and have seen early wins in this category. Sify has signed up several public sector banks across all regions. The other significant contracts were in the ecommerce category and multiple digital native customers. Sify also concluded network and security managed services contracts with customers from a logistics and manufacturing verticals. Sify's wireless data network was further augmented with the addition of over 200 base stations across the country. We also deployed a 100G capable backbone network in Mumbai to support high bandwidth addition across infrastructure and customer domains. Earlier in the year, Sify established a neutral internet exchange in partnership with Amsterdam Internet Exchange to support the growth of the internet ecosystem in India. This quarter, Sify expanded this internet exchange coverage to three locations in Mumbai. The business established a category of services to address the digital Cloud First, Mobile First enterprise. Business also successful completed trials of software define wide area network led technologies and is poised to cater to the cloud centric wide area networks of tomorrow. Now let me elaborate on the data center-centric IT services. Revenue from this business grew 30% over last year. Sify added 177 new clients across the data center-centric IT services during the year. A large private general insurance company signed a multi-year DC and DR outsourcing contract comprising of hosting IT infrastructure, managed IP, and security services. A private brokerage house has contracted Sify to build a Private Cloud in brokerage as a service model. An umbrella organization for operating retail payments and settlements systems in India has contracted with Sify to expand and build the next generation network and security infrastructure. A central government organization catering to IT needs of government of India has contracted with Sify for a complete technology refresh for their data center IT infrastructure. Another public sector insurance company has contracted Sify for outsourcing of the data center and disaster recovery. Gartner has elevated Sify to the Challenger category in their Magic Quadrant report of Hybrid Cloud Provider APAC 2017. Sify also won the CIO Choice award for Best Data Center Solution for 2017. Sify has augmented the cloud and managed services portfolio by including leading production tools like CISCO ACI data center fabric, IBM all-flash storage and ServiceNow. Sify iTest platform successful delivered 20 million assessments in FY 2017–18. Sify continues to demonstrate the ability to deliver large scale projects with multiple successful handovers including DC, DR, and data center transformation for a housing finance company, a large data center built for a public sector oil company, a significant wide area network rollout for a large public sector insurance company across thousand branches and commissioning of a data center for a central organization. Let me bring in Vijay, our CFO, to elaborate on the financial highlights for the past year. Vijay?

[M.P. Vijay Kumar:]

Thank you, Kamal, very good morning to everyone. Pleased to present the financial performance for the full financial year 2017–18. Revenue for the year was INR 2068 million, an increase of 12% over the last year. EBITDA for the year was INR 2,856 million, an increase of 11% over the last year. Net profit for the year was INR 924 million, an increase of 44% over the last year. Capital expenditure during the year was INR 1,888 million. We closed the year with a very strong quarter and significant increase in revenue. We continue to make selective investment in both infrastructure and tools. To leverage our existing infrastructure investment, we are focusing on bundling our data center centric IT services with our WAN and data center infrastructure; a strategy that is beginning to yield results. The board has recommended a dividend of 12%, which is subject to approval of shareholders. The cash balance as at the end of the year was INR 2,275 million. I will now hand you over to our chairman for his closing remarks. Chairman?

[Raju Vegesna:]

Thank you, Vijay. Over the years, Sify has successfully demonstrated its ability to grow up the value chain of its IT services. In the coming years, the clients and IT landscape will demand that we play the role of the IT strategist and architect. That will be the overall ambition of becoming an IT partner of choice. We will apprise you on our progress, until then thank you for joining on this call. I will now hand over to the operator for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Ben Klieve with Noble Capital Markets. Please proceed with your question.

[Ben Klieve:]

All right. Thank you. Hi, Kamal, Raju, and Vijay, thanks for taking my questions today, guys. A couple of questions first regarding data centers, I'm curious about the size of your data center footprint, do you feel like the physical footprint that you have today is sufficient to continue growing at the 30% clip you've seen over the last couple of years, or do you think you're going to need to make investments in that here in fiscal '19 in a meaningful way?

[Raju Vegesna:]

Yes, I think let me answer this thing. So I think the current data centers that is not enough, we are going to continuously investing in the data centers, and we acquired a land in Chennai and we acquired a land in Bangalore, and we are going to continuously doing probably one or two data centers in the next four-five years to cope up with the market. The demand for the data centers in India is very good and we see it's a continuous growth for us especially the data centers.

[Ben Klieve:]

And the one or two that you're going to add over the next four or five years, is that total or are you saying you're going to add one or two each year for the next four or five years?

[Raju Vegesna:]

One or two per year.

[Ben Klieve:]

Okay, perfect, thank you. And because there is so much demand do you see expansion of state owned and competitor owned facilities that you can grow from as well, or do you think the growth that you see over the next few years is going to have to be driven by a facility that you own?

[Raju Vegesna:]

No, the way we look at it is some of the things are enterprises, public sectors, they won't, but we see ourselves growing in one or two per year in the next few years for that demand coming from the enterprises and some public sectors also.

[Ben Klieve:]

Okay, perfect, thank you. A few questions on the financial tier, so you've talked about the investments that you've made in growth over the last few quarters and its impact on gross margins, we saw gross margins slide again a bit about a 100 basis points from the third quarter to the fourth quarter. I guess, I'm curious where do you see gross margins in fiscal '19, do you think that decline is going to continue going forward or do you think the investments that you've made this year are going to translate to improved margins next year?

[Raju Vegesna:]

Vijay?

[M.P. Vijay Kumar:]

Yes, Vijay Kumar here. So as far as the investments are concerned, the investments particularly in the financial year '17-'18 have been largely on building capabilities within the organization in the are of managed services and application-led integration services, more so for industry standard application. And these investments are expected to yield positive results in the years to come, and just as our past strategy of focusing on creating datacenters and expertise around cloud is beginning to pay off now. These investments we believe are critical even if it means a hundred basis point reduction in the EBITDA margin because these are all investments for the future, and ensuring that our services portfolio is relevant for the market.

[Ben Klieve:]

Got you, yes. For what it's worth, I complete agree that those are critical investments to make. I guess I'm curious do you think that the kind of rebound. Do you think you're going to see that here in kind of the first-half of fiscal '19 or do you think the expansion in growth margins is going to take a few more quarters?

[M.P. Vijay Kumar:]

I wouldn't like to venture at this stage on making anything forward-looking, but if you were to go on the basis of our past credentials, the investment should start paying off soon. But having said that, we will continue to expand on our competencies and capabilities in the services area, and invest in people including on learning and development.

[Ben Klieve:]

Okay, perfect. Thank you. So you just said you hesitate on forward-looking statements here, but I guess just roughly with capital expenditures, can you help us understand kind of what you think your CapEx spend this year may be relative to fiscal '18. Do you think it'll be about the same? You think it'll increase a bit? Kind of directionally, where do you think CapEx is going to go this year?

[M.P. Vijay Kumar:]

Directionally it'll be marginally higher than what we have spent in the last year. And these investments will be largely around the datacenter, which Chairman had articulated a little while earlier.

[Ben Klieve:]

Okay, perfect. And then last question from me, and I'll jump back in queue here. The 12% dividend yield that you just talked about, now that's a significant yield and major step up. I'm curious is this going to be one-time dividend or are you going to spread it out and have a quarterly dividend payment going forward?

[M.P. Vijay Kumar:]

As far as the company's dividend philosophy is concerned, the last four years it has been an annual dividend. And we stepped up the dividend last year. And we are maintaining it consistent for this year which is the recommendation of the Board to the shareholder. So we will continue with our philosophy of annual dividend.

[Ben Klieve:]

Okay, very good. All right, thank you for taking my questions. I will get back in the queue.

[M.P. Vijay Kumar:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] There are no further questions at this time. I would like to turn the call back over to management for any closing remarks.

[Raju Vegesna:]

Thank you everyone for joining us on the call. And we look forward to interacting with you all through the year. Have a good day. Thank you.

[Operator:]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.