Sify Technologies Limited
Q2 2018 Earnings Call Transcript

Published: 22 Oct 2018

[Operator:]

Greetings and welcome to the Sify Technologies Financial Results for Second Quarter and Fiscal Year 2018, 2019. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Shiwei Yin. Thank you. You may begin.

[Shiwei Yin:]

Thank you, Melissa. I would like to extend a warm welcome to all our participants on behalf of Sify Technologies Ltd. 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. A replay of today's call may be accessed by dialing 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 release may include non-GAAP measures. Sify's results for the year are according to the International Financial Reporting Standards or IFRS, and 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 release and on this 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 present 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 everyone. Thank you for joining us on the call. We continue to see the growth in Global and Domestic enterprises, interest for their pan implementation both our telecom services [technical difficulty] business. These companies are able to leveraging the maturity of the Telecom, Data Center businesses -- and Data Center businesses and able to implement in the fastest time possible. And also the Government of India initiatives across the digitization, it's also opening up new opportunities across our services. Let me bring now our CEO, Kamal Nath, to explain more business highlights for the past quarter. Kamal?

[Kamal Nath:]

Thank you, Raju. Our recent wins are an endorsement of our vertical go-to-market strategy that was introduced a year earlier. This is reflecting positively on our revenue mix, profitability and new order book. Recent public policy changes regarding proposed data protection regulations in India and the Reserve Bank of India's directive on domiciling data in the country of origin is driving demand as more global players look at hosting their applications within India. Our Cloud@Core service lines are perfectly aligned to cater to these demands. The analysts community has been requesting for details on our business highlights and our growth drivers. Allow me to spend a few minutes detailing the same. Revenue from Data center centric IT services this quarter grew by 25% during the same quarter last year. Segment wise, revenue from data center services, cloud and managed services and technology integration services grew by 36%, 76%, and 52%, respectively. Revenue from applications integration services fell by 25%, post delivery last year of the largest online examination. Revenue from telecom centric services grew by over 4% over the same quarter last year. Again, segment wise, revenue from data and managed services grew 11%, while revenue from the wholesale voice business fell by 9% over the same quarter last year. Let me now expand upon the growth drivers. Indian enterprises are in the mode of accelerated adoption of cloud model to drive their digital transformation and digitalization initiatives. The cloud adoption is being driven by the scalable and flexible needs of data centers, as well as the need for digital tools like artificial intelligence, advanced analytics, IoT machine learning etcetera. This trend is visible among almost all the verticals of the industry. This is driving usage and monetization of cloud infrastructure, data centers and cloud aligned network infrastructures, the areas where Sify has invested majorly in India. Sify views its services business around cloud migration and management and cloud security to be an area of fast growth. On the Telecom front, Sify’s cloud and data center centric infrastructure was further expanded to include cloud interconnections with Google cloud during the quarter and launch of the nx400G capable metro infrastructure in the cities of Chennai and Bengaluru. Sify also augmented its wireless network across India, with 200 new base stations commissioned. A detailed list of our key wins is recorded in our press release which is now live on our Web site. Let me bring in Vijay, our CFO, to elaborate on the financial highlights for the past quarter. Vijay?

[Vijay Kumar:]

Thank you, Kamal. Good morning, everyone. Pleased to present the financial performance for the second quarter of financial year 2018, '19. Revenue for the quarter was INR5,509 million, an increase of 14% over the same quarter last year. EBITDA for the quarter was INR771 million, an increase of 8% over the same quarter last year. Net profit for the quarter was INR253 million, an increase of 25% over the same quarter last year. Capital expenditure during the quarter was INR598 million. Cash balance at the end of the quarter was INR1,466 million. We continue our investments, specifically in data center infrastructure and enhancement of our network and IT managed services portfolio. While our revenues continue to grow, we continue to focus on fiscal prudence in the face of a tightening market. We would also like to welcome Mr. Arun Seth, who has been appointed as Independent Director and Member, Audit Committee, subject to approval of shareholders today. With his appointment, Sify is now fully compliant with the NASDAQ Listing Rule 5605 on the number of Independent Directors on the Board and Audit Committee. A detailed announcement will follow shortly. I will now hand you over to our Chairman for his closing remarks. Chairman?

[Raju Vegesna:]

Thank you, Vijay Kumar. We are seeing a definite traction among the clients, who are signing up for our established solutions, while traditional verticals like banking and insurance will continue to be demand drivers. We are also seeing power, healthcare, and renewable resources among the new client profile. This broaden our scope of solutions and pushes us to create a new knowledgebase and that as you’re aware, we will be concentrating. Thank you for joining us 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 Greg Burns with Sidoti & Company. Please proceed with your question.

[Greg Burns:]

Good morning. So we’re seeing a lot of headlines around emerging markets and kind of they’ve been underperforming for the last couple of months. Certainly, it doesn’t sound like you’re kind of seeing any negative impact on the ground in India. But can you just give us an idea of kind of what you’re seeing relative to demand to maybe help us feel better about kind of the broader emerging market headlines that we’re seeing? Thanks.

[Raju Vegesna:]

As far as India is concerned, among the emerging markets as we see, India seems -- India is one of the most actively followed market, and given the focus of digitalization of the government and also of the enterprises. There is significant growth opportunities, which are visible in the pace in which Sify is operating. More specifically from a regulatory standpoint as we mentioned, as Kamal mentioned in his talk, we have the equivalent of GDPR regulations coming up in India, which is expected to be formally enacted in the next few months. There's lot of focus being given on ensuring the entire IT ecosystem becomes standalone in India and greater focus for data center and cloud operators in particular. That’s the space in which Sify has matured over time and we see the opportunities for India, in particular, and for Sify to be good in the near future.

[Greg Burns:]

Okay, great. And then on the last quarter, you discussed some projects or the timing of some projects that were the completion, I guess, we’re delayed a little bit. Did you see those close this quarter or do you still have some projects hanging out there that you had expected to close that might close over the second half of the year? Thanks.

[Raju Vegesna:]

Yes. Those projects, very nice that you observed it. Those projects have got build in this current quarter and they form part of the revenue of this quarter. And many of this projects are annuity revenue component as well and they will contribute to the revenues in future.

[Greg Burns:]

Okay. And then just for our understanding going forward, how do you recognize revenue on projects? Is this a percent of completion or you fully recognize revenue only when your project is completed? Could you just talk about how you account for projects?

[Raju Vegesna:]

Yes. There are some contracts where there is a single deliverable, those contracts revenue is recognized on completed contract method what we call in IFRS 15, which is our reporting language at the point in time. And for contracts where there are multiple deliverables which are spread over a period of time, we follow the percentage of completion method which is over a period of time. So we've both kinds of projects.

[Greg Burns:]

Okay, great. Thanks. And looking at the decline in the application integration services, when we look at online exams, don’t those occur every year like are those recurring or do you have kind of one-off large exams that might happen in 1-year that might not repeat in another year or is the timing maybe that large online exam that occurred in last year's quarter might be pushed out to the third quarter. Can you just help us understand the online exam market how that works and why there was such a big decline this quarter?

[Raju Vegesna:]

The -- its -- you should not look at it as a decline. It happened at the last year same quarter. We had significant customer engagement for that particular quarter, resulting in a spike of revenue. Excluding that particular engagement, the business growth has been pretty organic and we expect the business to perform at these levels under some sudden engagement comes from any customer to conduct some large volume of test.

[Greg Burns:]

Okay. So just -- so we understand these tests you can have spikes in demand or maybe there's a large test 1-year, it's not like every year the same test recur?

[Raju Vegesna:]

Correct.

[Greg Burns:]

Okay. All right.

[Raju Vegesna:]

Correct, correct. You’re right.

[Greg Burns:]

Okay. And then lastly, just -- you had 25% growth as a whole in your data center centric IT services. Can you just give us your view may be for the balance of the year? How you -- I just see that segment -- that consolidated segment of your business performing from a growth perspective?

[Raju Vegesna:]

We have all along refrained from making any forward-looking observation. But if we were to look at the past track record of the company, we have been able to sustain a reasonable growth rate and it looks like we should continue at similar growth rate as in the last year at the minimum.

[Greg Burns:]

Okay, great. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of [indiscernible]. Please proceed with your question.

[Unidentified Analyst:]

Hi. Thanks for taking my call. I have just three quick comments and three quick questions. As comments, I hope in the future you will please start the call on time. There's other earnings calls this time here. I hope you please release the earnings at least half hour before the call to give us the time to read it. And I hope you please include the segment revenue and EBITDA in the release so that we can look at that. Its -- I don’t understand why it wouldn’t be on the release itself. The questions are what were your receivables in the quarter? The first question is around receivables. What were they and what are you doing to bring down your receivables balance?

[Raju Vegesna:]

Okay. Let me just respond on the initial observations. Apologies for the delayed start, but we were all available for the call on time and I note your observation regarding sharing the information half an hour in advance. We have been always doing it, but let me check once again. This time I recall we sent it three hours before, but let me check on it. On the segment revenue, we’ve been publishing it as part of our 6-K filing half yearly and not 20-F. The 6-K will get filed in due course. On the receivables, in INR terms, the receivables are about INR8,500 million INR, which works to approximately about 140 days of receivables, which is partly due to the nature of our billing where we bill to the customers in advance -- quarterly in advance that’s the billing pattern we follow and collection happens in the subsequent period. Part of it is due to the customer profiling where we’re engaged to some extent with government customers and government projects the collections do take time, but our experience has been except a few projects. Even though they get delayed, there is no solvency risk and the money does come almost in full sans SLA credits.

[Unidentified Analyst:]

Just sticking to this receivables, if it were INR8,500 million at the end of the quarter, this is low -- as low as it's been since the end of 2017, but your cash balance has come down substantially despite the collections. Can you just talk a little bit about that?

[Raju Vegesna:]

Yes. As far as -- two points. One is as far as the receivables are concerned, one is the receivables are after adjusting for some of the setoffs which we do for the same customers where we have vendor engagement, so probably that comparison is not available on the face of it. Secondly, as far as the cash balance coming down is concerned, we -- as we’ve mentioned in the earlier calls and this call, we continue to expand on our invest -- on our infrastructure investments, particularly on the data center site. And these investments include capital advances also for capacity to be created in the near future. So that explains the reason as to why we have a lower cash balance.

[Unidentified Analyst:]

So what was the total debt -- has debt grown substantially? What was the debt in the quarter and also if you could disclose how much is U.S. denominated?

[Raju Vegesna:]

The debt is all INR denominated essentially. And in INR terms the long-term debt is about 2,500 -- I’m giving you approximate numbers.

[Unidentified Analyst:]

That’s fine.

[Raju Vegesna:]

INR2,500 million and out of this a portion of it is in the form of dollar-denominated debt which is about 20% of it.

[Unidentified Analyst:]

While your short-term debt is typically more substantial than your long-term debt, can you disclose what that is?

[Raju Vegesna:]

Yes. The short-term debt is essentially debt for working capital, which is debt for our customer projects, if any which we do and for financing the receivables.

[Unidentified Analyst:]

And what was that for the -- at the end of the quarter?

[Raju Vegesna:]

That amount is again approximately INR2,700 million.

[Unidentified Analyst:]

I apologize for asking this again. The short-term debt is INR2,700 million and the long-term is INR2,500 million?

[Raju Vegesna:]

Yes, exactly.

[Unidentified Analyst:]

Okay. What exchange rate -- what was the average exchange rate in the quarter?

[Raju Vegesna:]

Average exchange rate in the quarter was 69.

[Unidentified Analyst:]

And at the end of the quarter, it's like 72, right?

[Raju Vegesna:]

Yes. No, at the end of the quarter, it was of 74.

[Unidentified Analyst:]

74? Oh god, it's really working against you. And finally, you mentioned the GDPR compliance, that’s a big deal for you. That could be very much a driver of your business, but everyone is complaining about it. Have you seen an impact so far just from this GDFBR [ph] compliance? Are you seeing your customers increase their interest in your services simply for GDPR or are they going to fight it?

[Raju Vegesna:]

Okay. Just on the previous point, the 30th September exchange rate was 72.55, precise number.

[Unidentified Analyst:]

Okay. I appreciate it. Okay.

[Raju Vegesna:]

72.55, yes. So I just recall that. Now coming to this regulation, as far as GDPR or the equivalent in India what we call is IDPR, they impact to a large extent in terms of additional workload risk to be managed for those who are dealing with the consumer business, in particular. Sify is essentially an enterprise player and why it works favorably for us is what IDPR request is a robust process of handling IT data, and it also calls for many of the application providers to host the data in India, which is a directive from the central bank wherever there are financial application. So what this is, meaning is that many of them were hosting data outside the country are looking at data center in requirements within India and we are seeing demand growth and conversations around need for more collocation space for data centers and for moving workloads to the cloud and managing those workloads.

[Unidentified Analyst:]

I guess, just to refine the question, this compliance should be very good for your business except [indiscernible] that everyone is complaining about it. And nobody wants to do it. So are they going to fight it or they going to lobby against it? I’ve heard and I’ve read articles about congress getting involved, some of the European government's getting involved, or are they just going along with it and are we going to see a benefit to your business from it?

[Raju Vegesna:]

Yes. No, I -- you got it right. For Sify from business perspective, it is positive. But we are seeing many corporates, particularly who are engaged with consumer business, lobbying with the government's for dilution of this regulation. But as you would appreciate, most of the transformational changes, particularly where it involve regulation, some amount of lobbying for dilution or a smooth transition is what people would expect. So we are seeing similar conversations happening in India too. At this point of time, the IDPR regulation, government has published a draft bill for public comments and the public comments are yet to be debated. So we will get to know more about it in the next three, four months. But what we read is there is general acceptance of this regulation, so it might come in the same form or there could be some amount of dilution or some transition support.

[Unidentified Analyst:]

Yes, I mean, the other extreme is that multi nationals no longer want to do business in India because of this rule, but I think that’s highly unlikely. It seems like it will be very beneficial to your business.

[Raju Vegesna:]

You’re right.

[Unidentified Analyst:]

Thank you very much for taking my questions. I appreciate it.

[Raju Vegesna:]

We appreciate and I would just like to clarify the INR2,500 million, INR2,700 million are all approximate numbers. So I wanted to respond to immediately rather than telling that I will tell you later.

[Unidentified Analyst:]

Okay. But if you filed your 6-K or 6-F concurrent with your calls, we wouldn’t have to ask it.

[Raju Vegesna:]

Yes, yes. No, that would come in a few weeks time.

[Unidentified Analyst:]

Thank you.

[Raju Vegesna:]

I appreciate it.

[Operator:]

Thank you. There are no further questions at this time. I will turn the floor back to management for any final comments.

[Raju Vegesna:]

Thank you for everyone joining on the call and we are looking forward to interacting with you through the coming years. 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.