Sify Technologies Limited (SIFY) Q1 2006 Earnings Report, Transcript and Summary

(Operator Instructions) It is now my pleasure to introduce your host, Ms. Schrip Neehan. Ms. Neehan, you may begin your conference.

Thank you, operator. I would like to extend a warm welcome to all of our participants today on behalf of Sify Limited. I am joined on the call today by Mr. Raju Vegesna, Chairman, Sify Limited; and 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 me at the Global Consulting Group at 646-284-9418 and I will have one sent to you. Alternatively, you can obtain a copy of the release at the Investor 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 Information 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 and a reconciliation of such non-GAAP measures on the differences between such non-GAAP measures and the most comparable financial measures calculated and presented in accordance with GAAP are also available on 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, that 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 releases.…

Thank you, Raju. Hello, everyone. I shall now go into the details of our financial performance for the last quarter. Our revenues were $28.74 million for the first quarter; 29.1% higher than in the quarter ended June 30, 2005. The sequential growth in revenues over the previous quarter was 2.5%. Our cash profit in adjusted EBITDA terms for the quarter was $4.03 million compared to $0.32 million in the same quarter last year. We ended the quarter with a cash balance of $55.27 million, after incurring capital expenditures of about $6.7 million and $2 million paid towards the acquisition of Globe Travels USA during the quarter. Further details are available to you in our press release. During the last quarter, we invested in a new Data Center in Bangalore to meet our growing demand. We also completed the acquisition of Globe Travels, USA, to enhance revenue-earning opportunities for our portals and the iWay Cyber Cafe chain. We intend to continue our growth trajectory by investing in such opportunities as well as in extending our Network Infrastructure and reach to service growing demand from both the Enterprise and Consumer segments. Raju will now take you through some of the highlights of the quarter. Raju. Raju Vegesna: Thank you, Durgesh. I would like to cover a few key achievements during the quarter, starting with our portal business and the acquisition of Globe Travels USA. We acquired Global Travels, an Iowa-based organization engaged in online ticketing and travel-related business in the US-India segment, in a deal that includes cash of $2.5 million, in addition to the performance-related pay outs on stock options. Online travel is the fastest growing and highest revenue generating category in the eCommerce space in India. Sify expects to leverage its large NRI audience on samachar.com, and the distribution reach…

Our first question comes from George Mihalos - Gilford Securities. George Mihalos - Gilford Securities: Good evening, gentlemen. Welcome aboard, Raju. To begin with, on Mr. Ramaraj’s resignation, can you talk a little bit about what is behind that? How was his relationship with Sify and should we be expecting more of an exodus from some of the existing management team, which is something that some newspaper reports seem to be suggesting? Raju Vegesna: Let me address this question. Mr. Ramaraj was interested to look at other opportunities, to pursue whatever opportunities were available, as was stated in the press release. That is the answer to your first question. The second question, is the existing management team. George, you know in the newspapers you open up these days, you know how the market is in India with the opportunities. One thing I would say is, my engagement for Sify for the last, more than six months, Sify has a lot of bench. What I mean is, we have a very deep bench throughout the organization. India is a great pool of talent, and there are people who will exit depending upon what their priorities in life are. The management’s responsibility is to bring in new people and organically grow the people who have a lot of talent in the organization. George Mihalos - Gilford Securities: If we could maybe move on to the café business. It seems like you opened less cafes this quarter than has been the case. I think it is 100 versus 200, typically. Is that what we should expect going forward? Excluding the VoIP, where it sounds like there is some pricing pressure from competitors, what should we expect from the browsing revenue going forward? Why has that declined, given an increase in browsing rate and…

George, of the total portal revenue, advertising accounted for 50% compared to 58% in Q4. eCommerce accounted for 24% compared to 20% in Q4. Broadband content-related revenue accounted for 11%. Mobile accounted for 6%. Globe Travels, which is a new acquisition, accounted for about 9%. George Mihalos - Gilford Securities: What do you think it will take, just in general as you look at the industry, to ramp up mobile revenues? Does that mean there has to be a more favorable –

Exactly. A more favorable revenue split between the portal and the telephone company, which we are anticipating in order to make sure that the growth is contributing to the bottom line as well. George Mihalos - Gilford Securities: Last question: what are your expectations as far as growth for Globe Travels? Raju Vegesna: We have just started the business. Obviously we believe that this is a market where there is a huge growth and a large base. The U.S. to India travel space, where Globe Travels has a lot of strength, itself as a sector is growing by more than 20% to 25% a year. In addition, we also believe that there will be growth coming from domestic business. Also, it will take some time for us to ramp that up. Plus, there will be an opportunity for us to grow in allied areas like hotels and cars. So we expect that the growth rate will be very significant. Certainly, it will not be significantly lower or higher than our portal growth which, as you know, is almost 100% a year. Obviously this business will not match that, but certainly it will be a very large growth, a good size. George Mihalos - Gilford Securities: Thank you, gentlemen. Raju Vegesna: Thank you, George.

Our next question is from Sameet Sinha - Kauffman Brothers. Sameet Sinha - Kauffman Brothers: Good evening, gentlemen. I apologize. I am in the airport, so you might hear some background noise. Raju, as the new CEO, can you list your top 3 priorities for the Company? Are you seeing a lot of changes being made in the management structure, plus some top line initiatives or even bottom line growth initiatives? Raju Vegesna: Sameet, basically what our mission is, it is not changing much. Basically what our mission is to expand it with profitability. So in all of the businesses we have, like our Access Media, our portal, and the International business, we are investing and we want to grow each business with expansion and profitability. We are looking at each business, where we can grow. Sameet Sinha - Kauffman Brothers: Can you talk about your goals? Two or three-year goals for growth for top line for each of your businesses? Raju Vegesna: No, three years is too long to predict at this point. We want to grow as much as the market allows. We don’t want to leave anything on the table. Sameet Sinha - Kauffman Brothers: Any other priorities? You said expand profitably. How about the second or third priority? Raju Vegesna: Basically one other thing also is the majority of the focus now is domestic. One other thing is we want to expand more internationally. We are developing this technology for the Indian market, because one of the reasons Sify was in a [inaudible] we didn’t focus much outside the Indian market. That is one of the areas we are going to focus on. We are analyzing our costs to get this market, and leverage our knowledge, how we get in the market. That is one of…

Our next question is from Greg Wagner, private investor. Greg Wagner – Private Investor: Hello, gentlemen. I would be interested in any comments you have on the government licensing procedures going on now. I read yesterday in the Hindu Business Line that the government put a hold on our license because of some grey market activity. Can you talk about those issues of getting government licenses, and how we are going to proceed along? Thank you. Raju Vegesna: I think, Dennis, there is some misunderstanding in terms of the report. We do not believe the government has either stopped or discontinued issuing of licenses. As far as our license applications for NLD-ILD licenses is concerned, which only will regularize the activity that we are already doing – we have already got FIVB clearance in Sify Communications Ltd., which is a 74% owned subsidiary of Sify. The license is in the last stage of issuance. In fact, we have been advised as to how much fees we have to pay, and which we are in the process of depositing. So it is just a matter of certain formalities and procedure before we get the license. I do not believe that the government has either stopped giving fresh licenses or put any kind of halt on existing licenses. You must remember that we are already providing these services in our capital city ISP, which was permitted to provide these services. There was a change in the rules whereby a different license was required to be obtained, and the government throughout has assured us that they will not hamper our ability to provide the service to the customers because of this bureaucratic change. Greg Wagner – Private Investor: Fine, thank you.

(Operator Instructions) Our next question comes from Robin Ratouretnum – Sedna Capital. Robin Ratouretnum – Sedna Capital: Can you just talk a little bit about the online games, and when you think it will be a meaningful portion of revenue? Pijush Das: As you are aware, we are a publisher for A3. We have not yet commercialized this, but it is at the last stages. We will probably commercialize it in the next 10 days. We think that this business offers great potential. We have reached quite high levels of concurrency. Our registrations have gone up. We are looking to have a portfolio of online games. Right now, we only have A3 in our portfolio, but we think that it offers great potential. Robin Ratouretnum – Sedna Capital: Any metrics you can share on concurrent users or peak users? Pijush Das: At the moment, our peak users last quarter it was about 400,000 for online gaming, 400,000. It is free at the moment. Last quarter, registrations were about 53,000. Concurrency was about 400 only. At one moment, 400 people playing the game. This is expected to go up. This gives us the belief that there is potential. Robin Ratouretnum – Sedna Capital: Thank you very much.

Our next question comes from Madu Kadali – Fertile Mind Capital. Madu Kadali – Fertile Mind Capital: Welcome on board, Raju. Raju Vegesna: Thank you. Madu Kadali – Fertile Mind Capital: I have a couple of questions. I was wondering if you could touch a little bit on two things: broadband access and portal advertising. Can you give us some light on what the market is growing at today in India, and how is the competitive landscape? What is your market share? How are the pricing trends? I would appreciate it. Thank you. Pijush Das: We are the third-largest ISP in terms of broadband connections, we are the third-largest in India and the largest private player. Therefore, we have a membership of about 191,000 and we expect to grow to about 350,000 at the end of this year. Those are the figures we are looking at. Madu Kadali – Fertile Mind Capital: The 350,000 are broadband connections, right? Pijush Das: Yes. Madu Kadali – Fertile Mind Capital: What is the total market today in India? Pijush Das: Total market is a little over 1 million as of now. Madu Kadali – Fertile Mind Capital: Okay. Pijush Das: The largest player is obviously [inaudible], the Company. Madu Kadali – Fertile Mind Capital: How is the pricing pressure? Is there a pressure at all, or has it already reached the bottom at this point? Pijush Das: I think the pricing is not an issue. I think there is a different kind of class of people, customers, who take a different kind of solution. I think in all of India, people’s wealth is growing. People are trying to use the Internet. People will pay different kinds of products for different people. We are seeing this competition in the markets where we are competing in the low end. But there are other products in the strategies we are coming forward with for broadband, for a different class of customers where price is not an issue. Madu Kadali – Fertile Mind Capital: What is your current pricing right now? Pijush Das: Actually, one looks at the average revenue per user, ARPU is probably about 210 rupees. Cities ARPU is 332 rupees. Madu Kadali – Fertile Mind Capital: Pijush Das: On broadband access, obviously we are concentrating on 40 markets where we think the PC penetration is the highest. Madu Kadali – Fertile Mind Capital: All right. Can you talk about the portal business, advertising? Despite all of the growth talked about, I think the revenue doesn’t seem to catch up.

The portal business, as I mentioned earlier in response to another question, we had a sequential growth of about 17%. Growth compared to last year was about 96%. The growth has happened across the board, in eCommerce, in advertising and also in the interactive services, as well as in the travel business which we have just acquired. Our strategy, as Raju highlighted, is to focus on broadband content. Sifymax, we have had several new initiatives including Banglorelive, Mumbailive. We have taken a leadership stance in terms of the kind of initiatives that we are bringing, like the World Cup in local language, and that has made a big difference because soccer is becoming very, very popular in India and there are a lot of people who do not follow English but who would still be interested in the game. Similarly, we have made exclusive tie-ups with all of the three big television channels for content. We are also having several tie-ups with the film fraternity, initially we were having tie-ups with Hindi Film producers and now we have even tie-ups with regional film makers. So overall our strategy continues to focus on three areas which is entertainment, which includes movies, television, sports; eCommerce where we are taking a very strong position with [Tarvel] and lastly, eLearning, for which we should be seeing more initiatives in the next one or two quarters to come. Madu Kadali – Fertile Mind Capital: How is the pricing trend within advertising? Is the focus more on banner advertising or are you moving into more of a pay-per-click model? Raju Vegesna: Our focus is almost entirely on banner, on a CPM basis. Actually, if you look at our ability to monetize our page views, we have a disproportionate share of the advertising revenue in this country,…

Thank you. Our next question is from Joel Cameron with Norberg Capital.

Good evening. Before I ask my question, I would like to point out that your timing on reporting your June quarter seems to be somewhat tardy. I got this report 10 minutes before your conference call, so I cannot really look at it. I went on your website, and your June quarter is not on the website. I wonder if you might look at that, review that and possibly change that so that we have time to look at the numbers so that maybe we don’t ask such stupid questions. Raju Vegesna: I would like to apologize for the delay. We had in fact sent it out to the business wire much earlier and I think there was some technical problem in its distribution, which is why we waited a few minutes before starting the conference call as well. We will be much more careful in the future for sure. Thank you.

Well, Reuters says 12:48. I presume that is 12:30, 12:48 midnight, or that is 8:48 our time. The difference is about 8.5 hours, but you have 8.5 hours lead time to put this out. All right, let me get to my question. I notice in your quarter ’05, these numbers seem different than when you first reported it, i.e. the enterprise services were reported today at $12.00 million, whereas last year it was reported at $12.66. Access media was reported at $9.01 million, and last year you reported $9.50. Portals was $730,000 versus $770,000, and the others was $520,000 versus $550,000. So can you explain to me the revision downward from last year’s reported numbers in the four categories please?

Joe, actually, we use the comparable exchange rate for -- the results are in Indian rupees. Last year for the June quarter, when we published the results, the currency translation was at rupees 44.48 -- sorry, this was at the end of the March quarter, and at the current quarter end the Rupee has weakened, so the rupee is equal to 45.87 rupees to a dollar. Similarly, at the end of the June quarter last year, the rate was different and that accounts for this smaller variation between the numbers that are presented now versus what was you might have seen in the press release at the end of June last year.

So am I to take that as each quarter comes along, I will see an adjustment from the previous year’s quarter?

Yes, sir, because our results are in Indian rupees, so the comparison is done at the same exchange rate in order to reflect the same percentage growth as in Indian rupees.

Okay, fair enough. Thank you.

Gentlemen, there are no further questions in queue. Raju Vegesna: Thank you for joining us on the call, and we look forward to interacting with you all through the quarter and around this time thereafter. Thank you and goodbye.

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