Sify Technologies Limited (SIFY) Q2 2022 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Sify Technologies financial results for the second quarter and fiscal year 2022 and 2023. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mr. Praveen Krishna, Investor Relations. Praveen, the floor is yours.

Thank you. I'd like to extend a warm welcome to all our participants on behalf of Sify Technologies Limited. I'm joined on the call today by Mr. Raju Vegesna, our Chairman; Mr. Kamal Nath, Chief Executive Officer; and Mr. M. P. Vijay Kumar, Chief Financial Officer. 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 call Grayling Global at (646) 284-9400, and we will have one send on to you. Alternatively, you may obtain a copy of the release of the Investor Information section on the company's corporate website at www.sifytechnologies.com/investors. 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 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 will differ a word 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. Chairman?

Thank you, Praveen. Good morning, everyone. Thank you for joining us on the call. India has displaced a remarkable insulation [ against ] the global recession sentiment so far. This is due to the country's strong financial fundamentals and its attractiveness as a safe investment geography. The government has ensured that the economic agenda stays the course and the digital ambitions begin to deliver the intended social welfare gains. The influx of multinational companies is bringing both opportunities and technologies to our shores. Domestic enterprises and start-ups are banking on this positive sentiment to the accelerate their digital transformation journey. The future is full of promises and possibilities. Let me now bring in Kamal Nath, our CEO, to expand on some of our business highlights for the past quarter. Kamal?

Thank you, Raju. Indian enterprises have fast tracked their digital initiatives based on their success navigating the pandemic are now operationalizing the pandemic era innovations. Enterprise priorities are building business aligned digital models, enhancing end user experience, deploying resilient business continuity models and mitigating security risks. Our Data Center and Cloud Services, Digital and Network services are all important building blocks to enable customers' business priorities, and we expect each one of the businesses to grow with the related investments by the customers. Let me now expand on the business highlights for the quarter. Revenue from Data Center Services grew approximately 38% over same quarter last year. Revenue from Digital Services fell approximately 8% over the same quarter last year. Revenue from Network Services grew by 14% over same quarter last year. Revenue split between the businesses for the quarter was Data Center colocation services at 32%, Digital Services at 25% and Network Services at 43%. During the quarter, Sify has invested USD 772,000 in startups in the Silicon Valley area as part of our corporate venture capital initiative. To date, the cumulative investments stand at USD 4.21 million. Sify commissioned incremental capacity of 5 megawatt at the Hyderabad data center in the quarter. As on September 30, 2022, Sify provides services via 834 fiber nodes and 1,880 wireless base stations across the country, a 10% and 2% increase, respectively, over the same quarter last year. The network connectivity services has now deployed 5,600 software-defined wide network service points across the country. 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, to elaborate on the financial highlights for the quarter. Vijay?

Yes. Thank you, Kamal. Good morning, everyone. Let me briefly sum up the financial performance for the second quarter of financial year 2022, '23. Revenue was INR 7,938 million. an increase of 14% over the same quarter last year. EBITDA was INR 1,509 million, an increase of 2% over the same quarter last year. Profit before tax was INR 220 million, a decrease of 52% over the same quarter last year. Profit after tax was INR 112 million, a decrease of 69% over the same quarter last year. Capital expenditure during the quarter was INR 2,234 million. We are leveraging on the demand to aggressively build capacity across our data centers. The investment into network and tools will be in synchrony with the demand without losing sight of fiscal discipline. With increase in capacity utilization, we should see our digital services, find demand and further contribute to the revenue mix. Cash balance at the end of the quarter was INR 2,775 million. I will now hand over to our Chairman for his closing remarks. Chairman?

Thank you, Vijay Kumar. Markets have always rebounded stronger after a lull. When that happened, enterprises will rest to make up for the last time. And in the process, look for partners and solutions, who can support and accelerate their growth. We want to be that partner. Thank you for joining us on the call. I will now hand over to the operator for questions. Operator?

[Operator Instructions] Your first question is coming from Jonathan Atkin of RBC Capital Markets.

Two, if I could? So first of all, on kind of connectivity network solutions and how that plays into cloud adoption and usage in India? What are you seeing in terms of cloud on-ramp demand? How are you participating in terms of facilitating access to some of the major cloud providers: Oracle, Amazon, Microsoft, Google and so forth? And any update on partnership arrangements with companies such as Megaport?

Jonathan, this is Raju. So Sify is in a unique position to offer the data centers and the network. As you know, to providing the network in India, you need a license. And we came from the network business before the data centers. We understand the network business very well. So we are connected probably 95% of the data centers across the country, and we have connected all the clouds in the country, not only our data centers and other competitive data centers also. So what we are seeing, we are winning when we are getting into the cloud. We are winning the cloud connectivities and the data center connectivities. That is growing. And what we see is it substantially is going to grow because now after the COVID, India started -- enterprises started transforming, the real transformation of the crowd is just starting across any hyperscalers and also private. So in the last 4 weeks, I'm in India, I visited about more than 40 customers, enterprise customers, everybody is looking at cloud, be it either a hyperscaler public cloud or a private cloud or hybrid models. So what we see as the Indian enterprises moving to the cloud, I think the network also is going to grow with the cloud. That's what we are seeing. That is where we are growing, and we are well positioned to grow with the cloud penetration in the Indian enterprise market.

So given your license and kind of preferred position as kind of a neutral -- cloud neutral, data center neutral provider, are there any partnerships to call out from non-Indian, whether it's telcos, non-Indian network as a service providers or other channel partners that you can maybe give us an update on, anybody -- anything specifically that's having success that you can point to in terms of partnerships?

Yes, we are -- we -- the things -- the partnerships, we are working with them, which I cannot disclose at this point. But we are working with the people from outside who looking at India as a growth story for them and people, who offer the cloud ramps or Internet exchanges or cloud exchanges. We are working a lot of -- the majority of those people to bring it to India. They see India as a growth story for them. And we are hosting in our data centers, and they're using our network facilities also.

And then on cloud then and kind of the hyperscale segment of the market, you have pointed to a large development pipeline, triple-digit megawatts that you plan to develop. How would you characterize the pace of absorption? In other words, over the next couple of years, how much do you intend to have sold of this large capacity in the pipeline and perhaps put this in the context of other players that are now more aggressively going into the market? You've got Adani, EdgeConneX, Digital Realty, Equinix, there's a lot more players, both domestic and international that are in the market to accommodate that demand. How do you see that playing out? And any commentary on pricing that you're seeing as well for these deals given both increased demand, but also presumably increased supply?

Yes. As you know, India is still a growth story. I see the 2 aspects of the India growth into the cloud. One is India is still a long way to go to an IT, in enterprises to go to IT. Second is people transform to the cloud from the on-perm data center to the co-lo or going to cloud. I'm seeing both sides of the increase of the growth, and that will bring India a much faster growth in all the metros. I see substantial growth is going to happen from now to next 5 years. Only the thing is my -- India as a country is going to grow, how the world markets, uncertainty of the world markets can influence India growth, that is still uncertain. But as in India, it will grow. So like you said, I'm -- we are one of the top 3 providers of the data centers in the country, and we are continuously building. And we are one of the guys, who did the data centers for last 20 years -- first Tier 3 data center in India. And yes, I agree with you, there is opportunities and there, global players are coming. And we have our own IP or intellectual way of differentiation to the global market. So we have existing hyperscalers in our data centers, and we are hosting prominent banks in India in our data centers. and prominent enterprises. So we have a very good customer base, both hyperscaler and the local enterprise business.

Your next question is coming from Greg Burns of Sidoti & Company.

What's driving the decline in digital services this quarter?

Yes. So Greg, as far as Digital Services business is concerned, one of the reasons for the decline is there are a couple of large digital transformation projects, which we have won just at the time of the end of the post-COVID -- end of the COVID period. Those projects are under execution, and they're very complex projects. And once those projects get completed, the revenue recognition would come in. So we have recognized all the costs associated with performing this obligation as an expense, and revenue will get recognized once we complete the performance obligation in the fourth -- in the near future.

Okay. And I guess that maybe partially answers my next question in terms of the EBITDA margin, took a step back this quarter. Maybe this is partially the reason for it. But is there any other reason why the margin is down? .

No other reason. In fact, as we have done in the past, we continue to invest in our people's skill sets and our tools. So we are not too much hung up about the timing of revenue recognition. It's important to build skillsets and capabilities for the future. The future looks very promising given all the 3 critical IT services, which we go to the market as a converged service network, data center and the digital transformation services. So we're not too much worried about the reduction in the EBITDA margin in this quarter. .

Okay. And then when we look at the opportunity on the Data Center side of the business, you didn't give an update this quarter, but it was, I think, 11 data centers with 100 megawatts of capacity, and you're looking to add another 200 megawatts over the next few years. So when we look at the -- can you help us maybe think about the revenue opportunity of that? Is it as simple as you're increasing capacity by 3x -- you get 3x your Data Center revenue from here? Is there anything you could do to help us maybe understand the revenue opportunity from the incremental capacity that you're bringing online? .

The new data centers are going live in the next fiscal year. And as you know, once the capacities go live, thereafter, the capacity consumption staff. Of course, some of the new capacities, we already have contracts in hand. So those revenues will start showing up thereafter. So the capacities which are under construction, out of the 200 meg, which is our overall pan over the next few years, 100 meg will go live in the next 18 months, depending on how the customers -- the pace at which the customers consume the capacity. But we stay committed to increasing our capacity by 200% from where we presently are. .

Okay. I guess I was just trying to understand more is the -- are the customers you're signing up maybe with these new data centers different from your existing customers? Is the pricing different? Like is the revenue, I guess, per megawatt or however you gauge it, the same for the next 200 megawatts as it is for the existing installed base? .

For part of the capacity, it is similar contracts and there are existing customer relationships. But as you know, we have enterprise customers as well. And you are also aware that the quality of data centers are getting better and incremental investments per megawatt are also higher. So going forward, the realizations will also improve accordingly.

[Operator Instructions] Gentlemen, there appears to be no further questions in the queue. I'll now hand back over to Raju for any closing remarks.

Thank you for your time on this call. We look forward to interacting with you through the year. From all of us here at Sify, wish you a very happy Diwali. Thank you.

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