Sify Technologies Limited (SIFY) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Sify Technologies Financial Results for First Quarter and Fiscal Year 2018-2019 Conference Call. All lines have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the call over to your host, Mr. Shiwei Yin. Sir, the floor is yours.

Thank you, Jess. I'd like to extend a warm welcome to all of our participants on behalf of Sify Technologies Limited. I am joined on the call today by Raju Vegesna, Chairman; Kamal Nath, CEO; and M. P. Vijay Kumar, CFO of Sify. Following our comments on the results, there will be an opportunity for questions. If you do not have a copy of our press release, please reach out and we'll have one sent to you. Alternatively, you may obtain a copy of the release at the investor information section on the company's corporate website at www.sifycorp.com. 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 website. 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 website. Before we continue, I'd 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 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. Sir?

Thank you, Shiwei. Good morning. And thank you for joining us on this call. The last two years, it has been seen the private Indian enterprises and the government rethink the whole of IT within their organization. While there is a continued aggression in their adoption, we are seeing a distinct maturity in the profile of services being contracted. The wisdom to contract with a single service provider is also allowing global MNCs entering India to shrink their go-to-market time. Our focus, this upcoming year, will be the solicited disruptive contracts that would help us to build a unique portfolio of knowledge-driven cloud and managed services. Let me bring in Kamal Nath, our CEO, to expand on our business performance for the past year. Kamal?

Thank you, Raju. With Cloud@Core at the heart of most of our service lines over the past one year, we have been able to establish our strategic relevance to our customers in their digital transformation journey. Today, we are one of the few Indian companies which serves the entire cloud spectrum of cloud enabling, cloud inspired, cloud pure, and cloud-enhanced services. These have also strongly supported the growth of our telecom business around the SD-WAN, cloud interconnects, and intelligent EDGE networks. The primary growth drivers in the markets are cloud adoption led by digital initiatives and transformation. This trend is triggering movement of workloads from on-premise data centers to hyperscale public cloud and hosted private cloud in varying degree, based on the digital objectives of the enterprises. This in turn is triggering 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, are shifting the balance to adoption of hyperscale public cloud versus private cloud. Collectively, these trends are generating opportunities for full-scale cloud DC and network service providers with digital services keys. Let me spend the next couple of minutes elaborating on our business highlights for the year. I'll start with the data center centric IT services first. 25 prominent customers signed to have their workload migrated from their on-premise data center to multiple clouds platform, including Sify Cloudinfinit, AWS, and Azure. These cover key verticals such as power, insurance, IT, logistics, real estate, media, healthcare, mobility solutions, enterprise messaging, and IT risk management organizations. 21 major logos signed up for the greenfield cloud implementation from verticals such as e-commerce, logistics, investments, finance, IT, manufacturing, retail, consulting and health care among others. 16 major sign-ups were recorded for disaster recovery service. Among them were clients from retail home appliances, automobile finance, automobile design, IT, and home finance. 11 customers moved from competitors' data center to Sify data centers, while 10 customers moved from their on-premise data center to Sify data center across power, IT, retail, media and communications, and healthcare verticals. Three state governments and Smart City in central India contracted to have private cloud commissioned at their data centers under the national e-governance plan. 30 prominent logos from across manufacturing, power, energy, IT, infra and government signed up for SAP services from Sify. Three regional TV networks and one daily publication signed up for CDN services on AWS. Multiple companies signed up for security services from among hospitality, banking, insurance, digital wallets, technology, and logistics sectors. The online assessment business successfully conducted more than 3.5 million cloud-based tests. On the telecom services front, the telecom centric services added 962 new customers in the year across various verticals and segments. During the year, there was significant expansion of the next-generation fiber access networks across four key markets, covering data centers and SEZs. The expansion is being driven by the demand from customers to connect to cloud and data centers as they embark on the cloud transformation journey. During the year, Sify expanded its Global CloudConnect platform and will now offer private connections to Google Cloud in India in addition to AWS and Microsoft Azure. Enterprises can now easily connect from 47 data centers and their offices in over 1,600 cities across India. Further expansion of the AWS interconnects was completed during the year providing customers with more choices. During the year, the business launched its managed and secured SD-WAN service and is seeing increasing demand from customers from this service as they transform their traditional enterprises WAN to a cloud-centric WAN. Some prominent names added to their roster included security in CAPS Logistics, a public-sector financial institution focused on small and medium industries, a government-owned export credit insurance company, and one of the largest public-sector power generation and distribution companies. The business saw growth rate in its EDGE Connect portfolio, with customers increasingly viewing the EDGE as a key area of innovation in a digital enterprise. Key wins include a large German engineering conglomerate, one of India's largest manufacturing companies, a leading FMCG brand, and the back-office of a large US-based bank. The business also saw steady progress in its IoT business. The key wins included contracts from a logistics provider and a farm equipment manufacturer in India. The business also won key contracts during the year from global customers including two new CDNs that have deployed in India, repeat orders from large data center interconnects from two leading global content providers, and a contract from a global cloud-based security provider for deployment in India. Let me now bring in Vijay, our CFO, to elaborate on the financial highlights for the past year. Vijay?

Thank you, Kamal. Good morning, everyone. I'm pleased to present the financial performance for the full financial year 2018-2019. Revenue for the year was INR 21,547 million, an increase of 4% over last year. EBITDA for the year was INR 3,122 million, an increase of 9% over last financial year. Net profit for the year was INR 1,069 million, an increase of 16% over the last financial year. Capital expenditure during the year was INR 4,051 million. Our revenue growth is lower than the prior year due primarily to the expiration of a large government multi-year services contract. Excluding this impact, the overall revenue growth was in line with last year's growth. In line with our focus on cash management, we've also taken a conscious business decision to reduce exposure to contracts with extended working capital cycles. The network and data center services continue to see demand and we are expanding on the capacity. We continue to make investments in our people and tools that complement digital transformation services for our clients. We will, as in the past, keep a tight leash on our costs and the turnaround times. The board has recommended a dividend of 12% from the paid-up capital, subject to approval from shareholders. Cash balance at the end of the year was INR 2,248 million. I will now hand you over to our Chairman for his closing remarks. Chairman?

Thank you, Vijay Kumar. The huge breadth of our services and experience gained over the years has firmly made us the partner of choice for the digital transformation for multiple clients. Our ability to enable multiple partner ecosystems is seen as a major asset. It is time to take these engagements to the next level and we will keep you posted as we progress. Thank you for joining us on this call. I will now hand over to the operator for questions.

Thank you. [Operator Instructions]. We'll will go first to Greg Burns at Sidoti & Company.

Hi. Good morning. I just wanted to get a little bit more color on your commentary around the aggression of adoption versus you're seeing a distinct change in the maturity of the profile services being contracted. Can you just help us understand what that means? Are you seeing a change in the market demand? How is that impacting your business? Thank you.

Vijay?

Yeah. As far as the customer relationships are concerned, as we articulated in our communication over the last few quarters, we are seeing increasing demand from customers for their digital transformation projects. This involves a significant engagement on the cloud and managed services portfolio and also integration of their applications on the cloud, so this together with the need for a higher bandwidth to enable access to the cloud is shifting the profile of the revenue within the same infrastructure services. And this is helping build a good portfolio of annuity services.

Okay, great. So, overall, I guess, you would characterize this direction the market is heading as a positive for Sify given your diverse services that you offer?

Correct.

Okay. Then, I just wanted to touch on the technology integration services. I guess growth was a little lower than we expected this quarter, a little bit slower than we've seen in the last couple of quarters. I know that's a project-based business, but if you can give us maybe a little bit of color on what was going on with that segment this quarter. Thanks.

Yeah. As I mentioned in my observations, the TIS project, in some cases, involve extended working capital cycle and long-term commitments to the customer projects. So, we have taken a conscious decision that we would be a little more choosy than in the past in engaging on such TIS projects and do a more rational capital allocation towards where the demand is, which at this point of time is significant on the data center and the cloud and managed services area.

Okay. So, then how should – I guess, given that change in strategy in terms of the business you're looking to contracts there, how should we think about that segment of the business going forward from a growth perspective?

So, we are going continuously in that business, Greg, but we will be cautious to pick up the opportunities which will fit to integrate with other services, our telecom and data center services.

Okay. And then, just lastly, the decline you've seen in the application integration services, excluding that large government contract, did the rest of that business grow this year and what kind of growth are you looking for next year?

I wouldn't like to comment on the estimated growth for the next year, Greg. But as far as the year which went by excluding that particular contract, we have seen a year-on-year growth of 17% versus 12% in the year before.

I'm sorry. Was that 17%?

Yeah, 17%.

Okay. And that was just for application integration services, specifically? That 17%?

Correct.

Okay. All right, thank you. I'll jump back in the queue.

[Operator Instructions]. We'll go next to Allen Klee at Maxim Group.

Good morning. Can you tell us, for the quarter, what the breakout was as a percent of revenue that was data centric relative to telecom centric?

For the quarter?

Yeah. Vijay Kumar, he's saying for the quarter, yes.

I just want to give an accurate number. Just give me a minute. Just give me a minute. It was around 60% -- was data center centric IT services was 60% of the overall quarterly revenue.

Thank you. And then, within data centric, can you give us an update of where you stand in terms of data centers and rental capacity and kind of the progression of adding potential – how much rental capacity and data centers you're thinking about adding for the remainder of this year and the next year?

One small correction to the statistics, which I gave you. It is 49%, not 60%. It's 49% data center centric IT services, which includes colocation, cloud and managed services, and our other IT services. Now, coming to your question regarding the…

I'm sorry, 59%?

Pardon? 49%. 49%.

49%, okay.

49%.

Thank you.

49% of our total revenues are data center centric IT services. And coming to your specific question on capacity, as far as our data centers are concerned, we have been building our capacity on a modular basis. And of the seven data centers, which are currently operational, and to the extent of the modules, what we call as performance optimized data centers, PODs which we refer, of the seven data centers, six of them are fully occupied, fully sold out. And one of them, we are now going through a technology enhancement process and will be ready for service again to the customers soon.

And in terms of how your roadmap from adding new rental capacity and services, how do you see that playing out over the rest of 2019 and 2020?

While I don't want to sound forward-looking, I'd just like to share that there is capacity getting added based on customer conversations and in-principal engagements which we have with a few large customers. Capacity additions are happening and scheduled to be ready for service in the financial year 2019-2020. And we should have a reasonably good growth rate similar to what we saw in the past year.

Thank you. And then, for this quarter, it looked like – just talking about profitability and margins, your gross margins were around 37%; EBITDA margins, 14.6%; operating margin, 9%. As we think about 2019, just what are the factors that we should think about that could make them kind of either move up or move down from what the run rate that they are at right now? Thank you.

As far as the margins are concerned, there should be improvement in a few hundred basis points. But having said that, we continue to invest on adding capacity in the form of people and tools for our managed services business. And we would like to continue that strategy given the visibility we have on the market for the future. So, while we would all focus to increase a few hundred basis points, we would not like to do it at the cost of slowing down capacity building.

So, what is the takeaway from that? Does that mean that the margins most likely stay the same or that because whatever the benefits are – I'm sorry, go ahead.

Correct. There would be some – I don't want to – pardon me for repeating this. I don't want to sound forward-looking, but the margin should be healthy. And it should probably be better than what we have achieved in the past.

Okay, thank you so much.

[Operator Instructions]. We'll return to Greg Burns of Sidoti & Company.

Hi. I just wanted to see if you had any update on the personal data protection bill, how that's progressing through parliament?

As you are aware, Greg, the Indian Parliament is now set for reelection. Elections are currently underway. The bill is still at the draft stage. So, once the new government is formed, which will happen probably end of May, and the new government settles down, that bill should happen. But more importantly, what we are seeing the ecosystem is, all the players who are operating in India, whether they are domestic players or overseas players, all of them are committed to provisions of that particular bill and are taking steps in that direction.

Okay, thanks. And the cash balance that you cited, is that net of bank overdraft?

No, it's gross. It's gross.

Gross. Okay. What was the bank overdraft this quarter or at the end of the year?

Bank overdraft in terms of dollars would be about – just give me a minute. Would be about $39 million.

Okay. And then, lastly, you mentioned your Cloud Interconnect and partnering now with Google, can you just remind us – I think some people might look at Google and Microsoft and Amazon and others as potential competitors in the market space. Could you just remind us how your either completing or benefiting and partnering with those kind of hyperscale cloud companies? Thank you.

Kamal, can you address that? Kamal?

Yes, Raju. Actually, sorry, I was not able to – I don't know whether you can hear me properly. The voice, particularly from the US side, is pretty poor. So, is the question that how we are getting benefited by the footprint of…

No, no. How we are going to – no, one second. Greg, see, there are public clouds, AWS, Google and Azure. And then, our Cloudinfinit, which we have developed for the last few years, our IP, see, the way we are looking at it is there are public cloud demands, the global public clouds, and there is a demand for the private clouds and hybrid clouds. See, the way we are playing the game is – people want to go Google, AWS or Azure, they will go. And then, people want to do a private cloud, they use Cloudinfinit. So, hybrid model is also going to work. That is the way we are playing our Cloudinfinit.

Okay. So, I guess, both partnering and, to some extent, competing against those larger players.

The competition is there are certain people who want to keep it private or close to their chest, whatever it is, right? So, still, that creates a private and public model. And our Cloudinfinit may be used as a private cloud model. And that's the way we are competing with the public clouds and also we are partnering with the public clouds, as you stated.

Okay, all right. Perfect, thanks.

Greg, actually, Chairman, in his closing remarks, has also mentioned a key sentence. In fact, it's almost the last part of his observation was our ability to enable multi-partner ecosystems is what is being experienced by customers as a major asset.

We'll return now to Allen Klee at Maxim Group.

Hi. Just housekeeping. What was your total debt for your fiscal year-end? And capital expenditures? Oh, you did give CapEx, sorry.

As far as the debt is concerned, let me share with you in dollars. Just a second. Approximately $44 million – totally about $75 million.

Great. Thank you.

And there appear to be no further questions at this time. I'd like to turn the call back to management for any closing remarks.

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