U.S. Markets open in 3 hrs 47 mins

Edited Transcript of SIFY earnings conference call or presentation 24-Jan-20 1:30pm GMT

Q3 2020 Sify Technologies Ltd Earnings Call

Chennai Jan 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Sify Technologies Ltd earnings conference call or presentation Friday, January 24, 2020 at 1:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Kamal Nath

Sify Technologies Limited - CEO

* M. P. Vijay Kumar

Sify Technologies Limited - CFO

* Raju Vegesna

Sify Technologies Limited - Chairman & MD

================================================================================

Conference Call Participants

================================================================================

* Gregory John Burns

Sidoti & Company, LLC - Senior Equity Research Analyst

* Jonathan Atkin

RBC Capital Markets, Research Division - MD and Senior Analyst

* Shiwei Yin;Grayling Investor Relations

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to your Sify Technologies Financial Results for the Third Quarter and Fiscal Year 2019/2020. (Operator Instructions)

At this time, it is my pleasure to turn the floor over to Mr. Shiwei Yin. Sir, the floor is yours.

--------------------------------------------------------------------------------

Shiwei Yin;Grayling Investor Relations, [2]

--------------------------------------------------------------------------------

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 Raju Vegesna, Chairman; Kamal Nath, Chief Executive Officer; and M.P. Vijay Kumar, Chief Financial Officer of Sify Technologies.

Following their comments on the results, there will be an opportunity for questions. If you do not have a copy of our press release, please let us know and we will have one sent to you. Alternatively, you may 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 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 somewhat from the GAAP announcements made in previous years. Our presentation of the most and directly comparable financial measures calculated and presented in accordance with GAAP and a reconciliation of such non-GAAP measures and 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 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 the 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 on the forward-looking statements but are not intended to represent a complete list of all risks and uncertainties inherent to the company's business.

(inaudible) introduce Mr. Raju Vegesna, Chairman of Sify Technologies Limited. Sir?

--------------------------------------------------------------------------------

Raju Vegesna, Sify Technologies Limited - Chairman & MD [3]

--------------------------------------------------------------------------------

Thank you, Shiwei. Good morning, everyone. Thank you for joining us on the call.

Most enterprises are viewing the current environment in India as an opportunity to reskill and reengineer their human power and their processes and be ready for the digital economy of tomorrow. This will drive both increasing consumption of Sify's infrastructure offerings as well as the increasing utilization of our digital transformation skills and services.

Let me bring Kamal Nath, our CEO, to expand on some of the business highlights of the past quarter. Kamal?

--------------------------------------------------------------------------------

Kamal Nath, Sify Technologies Limited - CEO [4]

--------------------------------------------------------------------------------

Thank you, Raju.

Our vision and strategy to align and lead with hybrid and multi-cloud models, supported by our relevant infrastructure investments, has put us strongly in the digital transformation pursuits of customers. Our cloud-aligned network and security transformation services are other areas which are not only supporting the customers' cloud adoption journey but have also opened up growth areas for us. We will continue to drive and strengthen this motion going forward.

In line with the continuing precedent, I would like to expand on the business highlights and our growth drivers. Revenue from data center-centric IT services stayed flat against the same quarter last year. However, segment-wise, revenue from Data Center Services, Cloud and Managed Services and Application Integration Services grew by 15%, 7% and 12%, respectively, while revenue from Technology Integration Services fell by 24%. Revenue from network-centric services grew by 8% over the same quarter last year. Segment-wise, revenue from Data Center Data Connectivity Services grew 12%, while revenue from the Voice business fell by 2%.

Let me now expand upon the growth drivers. The primary growth driver in the market continues to be 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 varied degrees based on the digital objectives of the enterprises. This results in transformation of the traditional network architecture and transformation at the edge, which connect 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 public cloud -- versus private cloud. Collectively, these trends are generating opportunities for full-scale cloud, data center and network service providers with digital services skills.

Let me summarize the categories of customers who are signing up with Sify as follows. Customers choosing Sify for migration of their on-premise data center to multi-cloud platforms like Cloudinfinite, AWS and Azure. They also entrusted Sify with management and security of the cloud infrastructure. Customers choosing Sify as their data center hosting partner as they embrace hybrid cloud strategy. Customers choosing Sify as their digital services partners. And customers choosing Sify as their network transformation and management partner as they migrate to cloud-ready network. 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 past quarter. Vijay?

--------------------------------------------------------------------------------

M. P. Vijay Kumar, Sify Technologies Limited - CFO [5]

--------------------------------------------------------------------------------

Thank you, Kamal.

Good morning, everyone, and wish you all a very happy 2020. Allow me to present the financial performance for the third quarter of financial year 2019/20.

Revenue for the quarter was INR 5,891 million, an increase of 3% over the same quarter last year. EBITDA for the quarter was INR 1,103 million, an increase of 40% over the same quarter last year. However, considering IFRS 16 on leases adoption from April 1, 2019, the increase is 23% on a comparable basis.

Profit before tax for the quarter was INR 249 million, a decrease of 20% over the same quarter last year. Profit after tax for the quarter was INR 164 million a decrease of 47% over the same quarter last year primarily due to tax expense of INR 8.5 million (sic) [INR 85 million] during the current quarter.

Capital expenditure outflow during the quarter was INR 1,089 million. We continue to invest with prudence on our capacity expansion, in particular in data centers and in people, for enhancing our scale of managed services.

While revenue and EBITDA have grown, the net profit has been tempered by the depreciation on new capacity, which has gone live, and related interest expense.

The tax expense is due to the company being subject to income tax in the current period as benefit of past losses had been utilized in full until last year.

Our cash balance at the end of the quarter stands at INR 2,204 million.

I will now hand you over to our Chairman for closing remarks. Chairman?

--------------------------------------------------------------------------------

Raju Vegesna, Sify Technologies Limited - Chairman & MD [6]

--------------------------------------------------------------------------------

Thank you, Vijay.

Between our unique brand of services, solutions and knowledge practices Sify has built a strong reputation as the go-to IT architect for small and medium businesses and also some signs of the enterprises. While this has built a fairly strong following, it is time to move up the value chain as the digital transformation specialist for the large enterprises, which we are doing.

Thank you for joining us on this call. I will now hand over to the operator for questions. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Greg Burns of Sidoti & Company.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [2]

--------------------------------------------------------------------------------

We're seeing a lot of headlines around the Indian economy, slowing growth there. Can you just maybe touch on the macro environment in India and how that may or may not be affecting demand for your services?

--------------------------------------------------------------------------------

Raju Vegesna, Sify Technologies Limited - Chairman & MD [3]

--------------------------------------------------------------------------------

Vijay, you want to handle this?

--------------------------------------------------------------------------------

M. P. Vijay Kumar, Sify Technologies Limited - CFO [4]

--------------------------------------------------------------------------------

Yes. As far as the environment in India is concerned, your observation is right that at a high level, the rate of growth of economy is lower than the past year. Having said that, the demand for IT services continues to be, as in the past, where companies are looking at this slowdown as an opportunity for reinventing themselves in terms of their processes by consuming IT. So we are engaged with our enterprise customers. The sales cycle is taking a little longer, but it is building up a healthy funnel. So we will see organically a lower growth rate for the company compared to the previous year, but the momentum remains good.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [5]

--------------------------------------------------------------------------------

And then you mentioned trying to move upmarket, move up the value chain. What kind of -- what do you need to do that? What needs to happen for you to be able to move upmarket, maybe investment-wise and technology or resources? Just how do you move from SMB focused to more enterprise?

--------------------------------------------------------------------------------

Raju Vegesna, Sify Technologies Limited - Chairman & MD [6]

--------------------------------------------------------------------------------

So then for that, so we have both network infrastructure and the data center infrastructure in place. The things, what we did to enable is more in the tools, automation and also skill sets of the people, which we are working on it. And also, the customer perception about Sify to getting into the value chain higher, that's our marketing initiatives. So we are winning. And as we win more and more cases, that will validate our integration solutions and increase our value of the proposition for the higher enterprises.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [7]

--------------------------------------------------------------------------------

And then just going back to the answer to the last question. You mentioned you're engaged with some enterprise customers' sales cycles taking longer. Is that in any specific business unit, cloud services, AIS? Where is -- where are you seeing that engagement? And where are the sales cycles getting longer?

--------------------------------------------------------------------------------

Raju Vegesna, Sify Technologies Limited - Chairman & MD [8]

--------------------------------------------------------------------------------

The sales cycle gets...

--------------------------------------------------------------------------------

Kamal Nath, Sify Technologies Limited - CEO [9]

--------------------------------------------------------------------------------

Yes. Raju, can I answer this?

--------------------------------------------------------------------------------

Raju Vegesna, Sify Technologies Limited - Chairman & MD [10]

--------------------------------------------------------------------------------

Yes. Go ahead, Kamal, yes.

--------------------------------------------------------------------------------

Kamal Nath, Sify Technologies Limited - CEO [11]

--------------------------------------------------------------------------------

Yes. Thank you. So we could see the -- while the engagements are on, but the customers are, by and large, postponing their buying decisions. This is specifically happening in the -- in some of the large segments traditionally where we are strong, one being the banking segment, where we have definitely seen a slowdown in the decision-making cycle, okay? And same holds good for manufacturing segment also. So these are the 2 big segments for us where we have seen decisions getting delayed. The customers are not shelving their projects, but their decision-making cycle is getting extended.

On the other hand, there are certain other verticals where the -- for example, the -- particularly the digital-native companies, they are deciding faster because they see this as a good opportunity to grow their business model. So it's a mix of both. But for us, it's in the banking, financial services and manufacturing. These are 2 big segments. So we are seeing -- on that part, Vijay was mentioning that -- a little slowdown on the decision-making process of customers.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [12]

--------------------------------------------------------------------------------

(inaudible) affecting any of your services specifically, like data centers, cloud and managed services? Where are you seeing this in terms of your services? Or is it just kind of broad based across the business?

--------------------------------------------------------------------------------

Kamal Nath, Sify Technologies Limited - CEO [13]

--------------------------------------------------------------------------------

Right. And so we expected that these segments would adopt cloud probably more aggressively than what is exactly happening now because our business plan was very much cloud aligned. But this is one area. And also, the market is not -- the market is actually behaving slower than what was predicted for cloud adoption, particularly the BFSI and manufacturing segment.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [14]

--------------------------------------------------------------------------------

All right. And then lastly, what was the debt balance at the end of the quarter?

--------------------------------------------------------------------------------

Kamal Nath, Sify Technologies Limited - CEO [15]

--------------------------------------------------------------------------------

I didn't get your question, please.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [16]

--------------------------------------------------------------------------------

The debt -- the balance of the debt at the end of the quarter?

--------------------------------------------------------------------------------

M. P. Vijay Kumar, Sify Technologies Limited - CFO [17]

--------------------------------------------------------------------------------

The balance of term debt at end of the quarter is about $60 million.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [18]

--------------------------------------------------------------------------------

6 -- 6-0?

--------------------------------------------------------------------------------

M. P. Vijay Kumar, Sify Technologies Limited - CFO [19]

--------------------------------------------------------------------------------

6-0. Term debt.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [20]

--------------------------------------------------------------------------------

Okay. And the total debt?

--------------------------------------------------------------------------------

M. P. Vijay Kumar, Sify Technologies Limited - CFO [21]

--------------------------------------------------------------------------------

Total debt is $110 million.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Our next question comes from Jon Atkin of RBC.

--------------------------------------------------------------------------------

Jonathan Atkin, RBC Capital Markets, Research Division - MD and Senior Analyst [23]

--------------------------------------------------------------------------------

A couple of questions about the data center colocation infrastructure segment. And as we think about data localization initiatives in India, I wonder if you could provide an update as to what one could expect on the legislative or regulatory front that might affect the fundamentals of colocation demand, particularly from international customers perhaps being required to store more data in India and driving the sector. Is there any kind of an update or set of expectations that you could share?

--------------------------------------------------------------------------------

Raju Vegesna, Sify Technologies Limited - Chairman & MD [24]

--------------------------------------------------------------------------------

So the -- I think better localization and continuous penetration of hyperscalers in India is growing well because hyperscalers, if you look at it, big cloud players, just entered -- a couple of them have entered -- a couple of them being entered into the market, and I think that progress is going very well. And similarly, we see the same trend from our enterprise and SME market. So as the -- Vijay and Kamal explained and due to some of the slowdown of the economy, I think we have a little bit far kind of thing. But what we see is as the economy is coming back, now I think everybody saw the advantage of these clouds being public, private or hybrid clouds. You will see much more penetration of this digital transformation going forward, and we see the continuous demand of the building the data centers across India.

--------------------------------------------------------------------------------

Jonathan Atkin, RBC Capital Markets, Research Division - MD and Senior Analyst [25]

--------------------------------------------------------------------------------

And then related to that, there has been quite a lot of interest on the part of both new entrants getting into the market, whether it's capital sources from within India or internationally, an example being Digital Realty and their announcement with Adani Enterprises. And I wondered if you could provide a perspective as to how that affects the -- in terms of your strategic positioning or competitively, commercially how that might affect you.

--------------------------------------------------------------------------------

Raju Vegesna, Sify Technologies Limited - Chairman & MD [26]

--------------------------------------------------------------------------------

So yes, that's a valid question. Then you will see a lot more people coming that will validate what are the business we are in, in the last 20 years. So definitely, there are more players that are coming, but we are an established player, and we have an established operation and have established skills and established engagement, both hyperscaler cloud providers or any enterprise, international enterprise customers and the local customers. So with our existence in the business for such a long time and continuous sustainable and operations plan, that gives us an advantage, and that will -- having more people enter into the same market, that definitely validates the potential to grow this market.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

(Operator Instructions) And there appear to be no further questions at this time. I will now turn the conference back over to management for closing remarks.

--------------------------------------------------------------------------------

Raju Vegesna, Sify Technologies Limited - Chairman & MD [28]

--------------------------------------------------------------------------------

Thank you, everyone, for joining us on the call, and we're looking forward to interacting with you throughout the year. Have a great day. Thank you. Bye.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.