Earnings Call Transcript - SIFY Q3 2020

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Sify Technologies' financial results for the third quarter and fiscal year 2020 to 2021. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Shiwei Yin. Sir, the floor is yours.

Shiwei Yin, Host

Thank you, Kate. I'd like to extend a warm welcome to all of 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 on the Investor Information section of the company's corporate website at www.citicorp.com. Some of the financial results 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 differences between certain 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 the 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. Now let me introduce Mr. Raju Vegesna, Chairman of Sify Technologies Limited. Sir?

Raju Vegesna, Chairman

Thank you, Shiwei. Good morning, everyone. Wishing you and your family a very healthy and happy New Year. Thank you for joining us on the call. The pandemic has been an inflection point in the way we do business. As the world rallied to find a cure, businesses and people demonstrated resilience and adaptability. Our clients are rediscovering the disruptive nature of artificial intelligence, distance learning, telemedicine, robotic process automation, and these should be long-term trends that are increasingly becoming accepted as mainstream technologies. These trends continue to stimulate demand for our data center and our network capacity and the services around our Data Center-centric and Network-centric businesses segment that Sify stays firmly committed to. So now I will ask our CEO, Kamal Nath, to expand on some of our business highlights for the past quarter. Kamal?

Kamal Nath, CEO

Yes. Thank you, Raju. In continuation of signs seen in earlier quarters, we are seeing an increased aggression in customers' decision-making and spending in areas of digitalization, business continuity plans, security, and remote working models. They are also allocating budgets for financial year '21-'22 along these lines. Overall, we are excited by these trends as our products, services, and business models are in complete alignment with the customers' priorities. I would now like to expand on the business highlights and our growth drivers. Revenue from Data Center-centric IT services grew 21% against the same quarter last year. Segment-wise, revenue from Data Center Services, Cloud and Managed Services, and Technology Integration Services grew 46%, 26%, and 13%, respectively, while revenue from Application Integration Services fell by 21%. Revenue from Network-centric services fell by 5% over the same quarter last year. Segment-wise, revenue from Data Connectivity Services grew 5%, while revenue from the Voice business fell by 32%. Let me now expand upon the growth drivers. The pandemic has accelerated the primary growth drivers in the market for cloud adoption, led by digital initiatives and transformation. This trend is triggering the 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. These reserves in transformation of the traditional network architecture are significant as they connect the end user. The need for digital services like analytics, data lakes, and IoT is shifting the balance to the adoption of hybrid and public cloud versus private cloud. Collectively, these trends are generating opportunities for full-scale cloud, data center, and network service providers with digital service skills. Let me summarize the categories of customers who are signing up with Sify: Customers choosing Sify for migration of their on-premise data center to multi-cloud platforms like Cloudinfinite, AWS, Azure, and Oracle. They also trust Sify with management and security. Customers choosing Sify as their data center hosting partner as they embrace hybrid cloud strategy, and customers choosing Sify as their multi-service digital transformation partner, as well as customers choosing Sify as their network transformation and management partner as they migrate to a 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. Vijay Kumar, CFO

Thank you, Kamal. Good morning, everyone. Allow me to sum up the financial performance for the third quarter of financial year 2020-'21. Revenue for the quarter was INR 6,301 million, a growth of 7% over the same quarter last year. EBITDA for the quarter was INR 1,291 million, an increase of 17% over the same quarter last year. Profit before tax for the quarter was INR 400 million, an increase of 61% over the same quarter last year. Profit after tax for the quarter was INR 252 million, an increase of 54% over the same quarter last year. Capital expenditure during the quarter was INR 1,140 million. Our Data Center and Network expansion plans remain on track. We will continue to invest in people and tools, while maintaining tight fiscal discipline. Our discretionary spending will remain contained in the short run without impacting the overall customer experience. Cash balance at the end of the quarter was INR 4,431 million. I will now hand over to our Chairman for his closing remarks. Chairman?

Raju Vegesna, Chairman

Thank you. Thank you, Vijay. India is in the midst of the largest vaccination drive globally. The proactiveness in early stages of vaccination is slowly bringing back confidence into the market. Businesses are aggressively adapting technology to bridge customer gaps, which, in turn, is creating a large demand for Digital Transformation Services. Our unique proposition of being a converged ICT player, offering services such as data centers and network services, has placed us in the right place at the right time. In time, we should unlock the full potential of all our services. Thank you for joining us on this call. I will now hand over to the operator for any questions. Operator?

Operator, Operator

[Operator Instructions] Our first question today is coming from Greg Burns.

Gregory Burns, Analyst

It's Greg Burns from Sidoti & Company. Could you just give us an update on your current data center footprint, what the utilization rates look like? And then prospectively, what the plans are for adding capacity to that?

Raju Vegesna, Chairman

Vijay?

M. Vijay Kumar, CFO

Yes. As far as our existing data centers are concerned, we have 10 data centers spread across 6 cities with an overall operational IT power capacity of 71 megawatts, of which we have contracted over 90% of the capacity. We are currently looking at adding new capacities as greenfield data center projects. I don't want to sound forward-looking at this point in time, but given the market opportunities that are available, we are timing our capacity creation to meet market demands by expanding the data center footprint in 3 cities: Mumbai, Noida, and Chennai.

Gregory Burns, Analyst

Okay. And then typically, do you pre-sell all the capacity? How does it work that you're adding capacity? I'm assuming there's some preselling going on. So how does that typically work?

M. Vijay Kumar, CFO

Sorry, Greg, your voice was breaking for me.

Raju Vegesna, Chairman

Greg, some of these things, yes, we are working. There are potential hyperscalers in the Indian market. Based on that, we are building in these 3 cities, as Vijay outlined, in our Mumbai and NCR, New Delhi area, and in Chennai. We are committed to building more data centers.

Gregory Burns, Analyst

Okay. And I guess, given these plans, could you give us an idea of what you expect CapEx to be over the next 12 months?

M. Vijay Kumar, CFO

Yes. For the next 12 months, we would have a capital expenditure requirement of approximately INR 4,000 million.

Gregory Burns, Analyst

Okay. And you mentioned the cash balance. What was your total debt balance at the end of the quarter?

M. Vijay Kumar, CFO

Our total debt balance in INR terms is approximately INR 9,000 million.

Gregory Burns, Analyst

Okay. And you mentioned, it seems like demand for your services is recovering from the pandemic. But can you give us your view on what differentiates Sify? Why might customers, businesses, or entities turn to Sify over another competitor in the market?

Raju Vegesna, Chairman

Yes, Kamal, do you want to address this?

Kamal Nath, CEO

Yes, sure. Thank you for asking this question. Sify is in a very unique position because we have all the right assets to move customers from the older IT model to a new cloud-based IT model. Our investments in data centers, our own cloud, our partnerships with hyperscale cloud providers, and significantly, our network investments are all required to transition customers' IT from the old model to the new model. There are very few competitors that have all these different assets with them. Additionally, our service capabilities, like migration services, managed services, and security services, are all critical when they need to run in this new framework. I think that way, we are significantly and uniquely positioned compared to our traditional competition in the data center space, the cloud space, or the network space.

Gregory Burns, Analyst

Okay. What are you seeing or hearing on the ground in talking to your customers? Is your project pipeline increasing? What is the demand outlook looking like going forward? Have you seen a noticeable improvement since the beginning of the pandemic?

Kamal Nath, CEO

Can you please repeat your question? Actually, I'm not sure why your voice is breaking. Vijay, are you able to hear him?

Gregory Burns, Analyst

Sorry, I can repeat it. I'm just asking about your project pipeline and what kind of demand you're seeing from your customers.

Raju Vegesna, Chairman

I think Greg, the pipeline is looking promising. We cannot give the details of the forecast, but the trend is positive.

Gregory Burns, Analyst

Great. Lastly, can you remind us why the Application Integration Services is down? What are the primary drivers behind that?

Raju Vegesna, Chairman

Vijay?

M. Vijay Kumar, CFO

Sorry, your voice is cracking for me actually. I heard something relating to application services...

Kamal Nath, CEO

He is asking why our application services business is going down.

M. Vijay Kumar, CFO

The voice was cracking.

Gregory Burns, Analyst

Yes. So why is there a decline in Application Integration Services?

M. Vijay Kumar, CFO

Okay. Kamal, would you like to respond on that? What is contributing to the decline in Application Integration Services?

Kamal Nath, CEO

Yes, it is predominantly due to a drop in the talent management business. I think that is predominantly the reason. There are no other factors. Yes, our application businesses are also seeing growth in cloud-aligned application businesses. However, the traditional items like talent management have seen a decline, which explains the negative growth in the application services.

Operator, Operator

Our next question today is coming from Jonathan Atkin.

Jonathan Atkin, Analyst

Jonathan Atkin from RBC Capital Markets. I have a couple of questions about international demand into India. Your press release mentions companies like Microsoft, AWS, and Oracle. What are the trends you are expecting overall for the Indian Data Center sector with these hyperscalers growing their presence in India? Will this be through third-party data center providers, or are they going to build their own sites? How do you see that playing out over the coming quarters?

Raju Vegesna, Chairman

Jonathan, this is Raju. India is a growth story for all the hyperscalers. I cannot name them individually, but we are working with every hyperscaler. They all want to come to India and are growing. They are looking at different models, such as build-to-suit and colo models, based on the opportunities they have. There is a significant opportunity for data center providers like us to collaborate with hyperscalers, and the market for hyperscalers in India is very promising.

Jonathan Atkin, Analyst

I have a couple of follow-ups. Since I think the last time we chatted in this forum, Equinix announced the acquisition of GPX; Digital Realty entered into an MoU with a local party. Given the interest level of U.S. companies making investments in India, does that have any strategic implications for Indian-based operators such as yourself?

Raju Vegesna, Chairman

No. There are foreign operators entering the market, but many Indian operators are also making strides. The penetration of IT in India is very small. I often draw an analogy to how mobile technology took off in India, and I believe the same will happen with cloud, whether it be through hyperscale public cloud, private cloud, or hybrid models. I believe hybrid will be the way to go, and businesses will not rely entirely on hyperscalers. There is tremendous demand for both data centers and networks as businesses increasingly go online in sectors such as retail, healthcare, and education. It is not just about data centers; without a proper network, there will be bottlenecks. This is why Sify is uniquely positioned with a presence in both data centers and networks.

Jonathan Atkin, Analyst

Given the integrated services and solutions you offer, how do you think about the optimal revenue mix going forward? The CapEx number shared suggests a significant investment in new inventory. One could pursue large deals with fewer services or smaller enterprise customers with more multifaceted solutions. How do you balance these strategies?

Raju Vegesna, Chairman

That's a very good question, but it's a balancing act. We have data centers, a network, and IT services. Data centers require substantial CapEx, but it's possible to build them modularly rather than putting all the money upfront. The network business also requires a lot of CapEx. We are not a mobile operator; our customers are OTT players and hyperscalers who need the network. We will work with the same partners to enable our network business and simultaneously support the enterprise market, where we have many customers in sectors like BFSI, manufacturing, and retail. Our IT services require minimal CapEx, focusing mostly on skilled manpower. So, if I had to give a rough ratio, about 70% to 80% of our CapEx goes into the data centers, approximately 20% to 30% goes into the network, and about 5% goes into IT services. That’s how I envision our future CapEx allocations.

Operator, Operator

We have no further questions in queue at this time. Do you have any closing remarks you'd like to finish with?

Raju Vegesna, Chairman

Thank you to everyone for joining us on this call. We look forward to interacting with you throughout the year. Stay safe, stay healthy, and have a better year ahead. Thank you.

Operator, Operator

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