Earnings Call Transcript - SIFY Q3 2022

Operator, Operator

Good morning, and welcome to Sify Technologies Financial Results for the Third Quarter and Fiscal Year 2022 to 2023. Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Praveen Krishna. Praveen, the floor is yours.

Praveen Krishna, Host

Thank you, Jenny. I would 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, our Chairman; M. P. Vijay Kumar, Executive Director and Group CFO; and Kamal Nath, CEO. 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'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.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 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 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 sees protection 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.

Raju Vegesna, Chairman

Thank you, Praveen. Good morning, everyone, and thank you for joining us on the call. India's resilience demonstrated post-COVID has formally established it as an economy that is not easily disturbed by changes in the business environment. This, along with an aggressive adoption of digital tools, has worked well for the economy. The government's larger agenda of ensuring that social measures reach the intended beneficiaries is a work in progress, and we'll continue to drive the domestic IT demand. International demand is expected to continue due to the attractive nature of the Indian market despite the tightening global economy. Together, this works well for an economy that is still in the early stages of realizing its potential. Let me now bring in Kamal, our CEO, to expand on some of the business highlights for the past quarter.

Kamal Nath, CEO

Yes. Thank you, Raju. Indian enterprises have fast-tracked their digital initiatives based on their success in navigating the pandemic and are now operationalizing 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. We expect each of the businesses to grow with the related investments. Let me now expand on the business balance for the quarter. Revenue from Data Center Services grew approximately 19% over the same quarter last year. Revenue from Digital Services grew approximately 90% over the same quarter last year. Revenue from Network Services grew by 8% over the same quarter last year. The revenue split between the businesses for the quarter was Data Center Colocation Services at 27%; Digital Services at 35%; and Network Services at 38%. Sify commissioned incremental data center capacity of 4.1 megawatts in the quarter. As of December 31, 2022, Sify provides services via 846 fiber nodes across the country, an 11% increase over the same quarter last year. The network connectivity service has now deployed 5,900 service bonds across the country. During the quarter, Sify has invested USD 482,000 in start-ups in the Silicon Valley area as part of our corporate venture capital initiative. To date, the cumulative investment stands at USD 4.69 million. A detailed list of our key wins is recorded in our press release, now live on our website. Let me bring in Vijay, our Executive Director and our Group CFO, to elaborate on the financial highlights for the quarter.

M. Vijay Kumar, Executive Director and Group CFO

Thank you, Kamal. Good morning, everyone. Let me briefly sum up the financial performance for the third quarter of financial year 2022, '23. Revenue was INR 896 million, an increase of 31% over the same quarter last year. EBITDA was INR 1,619 million, an increase of 3% over the same quarter last year. Profit before tax was INR 227 million, a decrease of 52% over the same quarter last year. Profit after tax was INR 258 million, a decrease of 25% over the same quarter last year. The profit after tax is higher than the profit before tax due to the recognition of a deferred tax asset. Capital expenditure during the quarter was INR 4,226 million. Our investment into the Data Center side of the business continues with incoming demand from both retail and hyperscale customers. We have scaled up investments, both capital expenditure and operating expenditure in our fiber network in select metro cities to enhance our network business and in personnel for our Digital Services business. Network connectivity, cloud interconnect, and resultant investment in tools and processes will augment this demand. Fiscal discipline will be a constant priority in our investment process. Cash balance at the end of the quarter was INR 4,256 million. I will now hand over to our Chairman for his closing remarks.

Raju Vegesna, Chairman

Thank you, Vijay. Enterprises now view digital adoption as a business imperative. Based on the size of their investment and ambitions, it will require continuous engagement with service providers like us. Our aim is to become a constant factor in their consideration bracket. Thank you for joining us on this call. I will now hand over to the operator for questions.

Operator, Operator

Your first question is coming from Greg Burns at Sidoti & Company.

Gregory Burns, Analyst

The EBITDA margin came in a little bit below what I was expecting. I think some of that's due to mix, but was there anything outside of the higher mix of digital services that led to the lower margin?

M. Vijay Kumar, Executive Director and Group CFO

You're right. It is essentially due to our investments into personnel costs for our digital services business. And as I mentioned, it is also due to operating expenses, investment in our network fiber expansion in select metro cities.

Gregory Burns, Analyst

Okay. Do you see the margin contracting further from here? Or are you going to start to get some leverage on these investments? I guess, when will you start to see the revenue from these investments offsetting some of the incremental spend?

M. Vijay Kumar, Executive Director and Group CFO

Correct. I think the incremental spend should help us to scale up our revenue and margins in the future. As you know, these infrastructure businesses require continuous investments for us to scale on both revenue and profitability. So these expenses are in that direction.

Gregory Burns, Analyst

Okay. Maybe just to ask another way, do you expect to increase investments further from here? I mean, or is this a good margin level to model out? Or are we going to contract a little bit more before we grow them again?

M. Vijay Kumar, Executive Director and Group CFO

I don't want to sound forward-looking, but we believe that we have made investments over the last few quarters. At the current level, we should start monetizing the same in the future.

Gregory Burns, Analyst

Okay. Perfect. And then just to dig into what drove the strong growth on the digital service side of the business. What was the main driver of that?

M. Vijay Kumar, Executive Director and Group CFO

Kamal?

Kamal Nath, CEO

So, two or three reasons I will assign. We had order books for some medium-sized and large-sized projects. As and when we have completed the projects, we have been able to recognize the revenue. So there were some seasonal aspects to it with respect to the completion of the project and the recognition of the revenue during the quarter. That is one. Moreover, we are also seeing an increase in business acquisition in the digital services space. So those are the two primary reasons.

Gregory Burns, Analyst

Okay. So as some timing on projects on the technology integration services side of the business. And I guess that looking out, we would expect that to step back down maybe next quarter or maybe not if the pipeline is strong. How should we think about that going forward?

Kamal Nath, CEO

Right. These projects take a lot of time because they are transformational in nature, which includes technology introduction as well as a bit of managed services and cloud services. The clients expect transformational outcomes as a part of the scope of work, post which we get the sign-off. So even if the projects are great, they are complex at the same time. We may see seasonal revenue recognition increases based on the timeline of the project implementation. That's how we define these characteristics.

Gregory Burns, Analyst

Okay. But you still feel good about the pipeline of demand?

Kamal Nath, CEO

Yes, yes.

Gregory Burns, Analyst

Okay. And then in terms of the capital from Kotak, how much of you’ve drawn from Kotak and how much remains outstanding?

M. Vijay Kumar, Executive Director and Group CFO

Yes. In rupee terms, we have so far drawn INR 4,000 million, and we have the option to draw a further INR 6,000 million.

Gregory Burns, Analyst

Okay. Perfect. And in terms of your data center capacity, how much incremental megawatts of capacity do you expect to come online this year?

M. Vijay Kumar, Executive Director and Group CFO

In the fiscal year ending March '23, the incremental capacity will be small, but there are three greenfield projects presently under construction in three major cities: Mumbai, Noida, which is part of Delhi, and Chennai. All three are expected to become operational by the end of calendar year '23. They are designed for an initial capacity of about 78 megawatts, but we will start delivering it in stages to our customers.

Gregory Burns, Analyst

Okay. So, okay. Perfect. So those will start coming online throughout the calendar year or?

M. Vijay Kumar, Executive Director and Group CFO

Yes. It's actually the later part of the calendar year.

Gregory Burns, Analyst

Okay, perfect. And the start-up investments you're making in Silicon Valley, is that to acquire technology? Or is that purely just a financial investment you're making there?

M. Vijay Kumar, Executive Director and Group CFO

These are basically to access technology, which we can bring to our enterprise customers in India in their journey for digital transformation.

Gregory Burns, Analyst

The data center revenue growth was a bit lower than I anticipated and it actually decreased slightly sequentially. What is contributing to that? I usually consider that business to experience steady growth, but there may be other factors causing fluctuations from one quarter to another.

M. Vijay Kumar, Executive Director and Group CFO

There's actually no fluctuation. As you rightly observed, it is steady revenue. Last quarter, we had some one-time capacity delivery revenue which accrued to us. The recurring revenue continues to be stable, and the recurring revenue will start growing as new capacity gets operationalized.

Gregory Burns, Analyst

Okay. Perfect. All right. That's everything for me.

M. Vijay Kumar, Executive Director and Group CFO

Thank you.

Operator, Operator

Okay. We don't have any other questions, so I will now turn it back over to the management for any closing remarks.

M. Vijay Kumar, Executive Director and Group CFO

Thank you for your time on this call. We look forward to interacting with you throughout the year. Thank you.

Operator, Operator

Thank you, everybody. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.