Earnings Call Transcript - SIFY Q4 2020

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Sify Technologies Financial Results for Fiscal Year 2020 Through 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. 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, Chairman; Kamal Nath, Chief Executive Officer; and M. P. Vijay Kumar, Chief Financial Officer of Sify Technologies. Following our comments on the results, there will be an opportunity for questions. If you do not have a copy of the press release, please let us know and we'll have one sent to you. Alternatively, you may obtain a copy of the release at the company's investor information section on the company's website at www.sifytechnologies.com/investors. A replay of today's call may be accessed by dialing in to the numbers provided in the press release or by accessing the webcast information in the investor information section of the Sify Corporate website. Some of the financial measures referred to during the call and in the earnings release may include non-GAAP measures. Sify's results are according to the International Financial Reporting Standards, or IFRS. 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 seeks protection afforded by the Private Securities Litigation Reform Act of 1995. These risks include a variety of factors including comparative 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?

Raju Vegesna, Chairman

Thank you. Good morning. I trust you and your family are staying safe. Thank you for joining us on the call. As you know, India is in the grip of the second wave of the COVID pandemic, our government reintroduced lockdowns to deal with the situation. The first wave was a wake-up call for large companies to increase their investments in digital transformation, and that has helped insulate them to a large extent this time around. Now that the merits of digital transformation have been firmly established, we should see more midsized businesses adopt automation aggressively. The new normal has blurred the lines between work and home environments, calling for businesses to invest in the security of their data over public networks. The challenge is ensuring that public networks are as secure and resilient as corporate networks. That said, we hope the situation will be over soon, so that people and livelihoods can return to the old normal. Let me bring in Kamal, our CEO, to expand on some of the business highlights for the past year. Kamal?

Kamal Nath, CEO

Yes. Thank you, Raju. A year into the pandemic, all industries cutting across small, medium, and large have accelerated their digital transformation and cloud adoption drives to sustain and grow their businesses in a changed environment. Work from anywhere, movement to hybrid cloud platforms, strengthening disaster recovery plans to enable business continuity, application modernization, all these market trends find a natural solution in Sify's Cloud@Core model and offerings. The other important highlight is the growth of hyperscale cloud service providers and OTT players in India, which, on one hand, is accelerating our data center colocation business, and on the other hand, strengthening our hybrid cloud offerings. Overall, we are on the right side of this path. I would now like to expand on the business highlights and our growth drivers. Revenue from Data Center Services grew by 22% over last year. Segment-wise, revenue from Data Center Services grew by 45%. Cloud and Managed Services grew by 21%, and Technology Integration Services grew by 19%, while Application Integration Services fell by 19% over last year. Revenue from Network-centric services fell by 7% over last year. Segment-wise, revenue from Data and Managed Services grew by 4%, and the Voice business fell by 35% over last year. 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 movement of our cloud from on-premise data centers to hyperscale public cloud and hosted cloud in varied degrees based on the digital objectives of the enterprises. This results in the 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, etc., are 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 services from network service providers with digital service schemes. Let me summarize the categories of customers who are signing up with Sify. Customers choosing Sify for migration of their on-premise data centers to multi-cloud platforms like Cloudinfinit, AWS, Azure, and Oracle. They also entrusted Sify with management and security. Customers choosing Sify as their data center hosting partner as they embrace hybrid cloud strategy. Customers choosing Sify as their multiservice digital transformation partner, and customers choosing Sify as a 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 year. Vijay?

M. Vijay Kumar, CFO

Thank you, Kamal. Good morning, everyone. Let me sum up the performance for the financial year 2021. Revenue for the year was INR 24,320 million, an increase of 6% over the last financial year. EBITDA for the year was INR 5,085 million, an increase of 25% over the last year. Profit before tax for the year was INR 1,599 million, an increase of 57% over last year. Net profit for the year was INR 1,585 million. A deferred tax asset of INR 600 million has been recognized at the end of the year based on an assessment of reasonable certainty of future taxable income in the individual entities of the group. In future, tax expense, comprising current tax and deferred tax, is expected to be in line with the effective tax rate. Capital expenditure for the year was INR 3,483 million. Cash balance at the end of the year was INR 5,438 million. We continue to show steady growth through 2021 despite the challenges that the pandemic has posed. The healthy EBITDA growth has increased our confidence to invest in both people and tools to enhance our digital transformation service capabilities. We expect contracts to take slightly longer to conclude as clients take time to regain momentum. Our focus is on insulating the organization as we carefully manage our costs while ensuring that there is no lag in service delivery and customer experience. We are firm in our commitment to our data center, cloud, and network-centric expansion plan and will exercise caution regarding both timing and cost structure of these projects. Considering the resurgent pandemic and the uncertainty regarding the pace of economic recovery, the Board of Directors did not recommend the payment of dividends this year and instead advised that capital be conserved and used for capital asset expansion. Following shareholders' approval, we have executed business transfer agreements entered into during the quarter for the transfer of data center and digital services businesses to wholly owned subsidiary companies.

Raju Vegesna, Chairman

Thank you, Vijay. A good number of enterprises that didn't transform themselves during the first phase of the pandemic have begun exhibiting renewed enthusiasm towards adopting automation, digital transformation, and cloud adoption. Many of them are considering outsourcing their complete IT services to players like us, who can provide the data centers, hybrid cloud, and networking. We are seeing a lot of demand for these integrated solutions, providing end-to-end data centers, hybrid cloud, and networks. We expect continued interest from Indian enterprises looking for data centers, cloud, and networking solutions. As our CFO, Vijay, mentioned, we will continuously invest in our data centers, and we are developing many excellent data centers across all our regions. We will continue to invest, and we will accelerate this as the demand for data centers is growing in India. Similarly, not only the data centers but also the bandwidth consumption is increasing, and we are going to invest in our network technology across the country. Moreover, our digital transformation, including our multi-cloud platform and digital services platform, will also see increased investment. Thank you for joining us on this call. I will now hand over to the operator for questions. Operator?

Operator, Operator

[Operator Instructions] And our first question today is coming from Greg Burns at Sidoti Company.

Gregory Burns, Analyst

Can you just talk about the business transfer agreement for the data centers? What is the rationale for that, and what does that mean for this perspective?

Kamal Nath, CEO

See, Greg, the rationale is that people maintaining their own server rooms and data centers find it very challenging to keep up with the manpower and resources required to run Tier 3 data centers with high-level redundancy and SLAs. Instead of building and managing their own server rooms or data centers, they are increasingly adopting outsourcing solutions. That is where we see a surge in data center usage. Second, we have all the major hyperscalers in India, and people are starting to use cloud solutions offered by hyperscalers. We are witnessing exponential growth in cloud adoption, which benefits both the hyperscalers and our hybrid solutions utilizing Sify's Cloudinfinit platform, which allows for a hybrid model with hyperscalers. This is where we observe growing adoption across data centers and hyperscalers and hybrid cloud models.

Gregory Burns, Analyst

Okay. Thanks for that color on the demand. I was more asking about the business transfer agreement you mentioned or that Vijay mentioned, regarding moving the data centers to wholly owned subsidiaries. Could you help me understand what that means, rationale there?

Kamal Nath, CEO

Okay. Vijay?

M. Vijay Kumar, CFO

Yes. Greg, given that the data center businesses are scaling and capital-intensive, while the digital services business is more IP-led and involves people and tools, we believe it is time to create independent companies for these two businesses, both of which will be wholly owned subsidiaries. At a consolidated level, they will not mean any difference, but organizationally, they will help the companies to grow at a faster pace and become larger businesses over time.

Gregory Burns, Analyst

Okay. Great. In terms of the investments you mentioned for next year, what is your projection for CapEx for the full year for the next fiscal year?

M. Vijay Kumar, CFO

We expect it to be slightly more than what we invested last year. Last year, we spent about INR 3,483 million. Assuming the pandemic does not impact our capacity creation significantly, we should be able to invest much more than what we did in the previous year.

Gregory Burns, Analyst

Okay. And then regarding the investments in people and tools for your digital service transformation capabilities, how should we think about the EBITDA margin for next year? Do you expect it to contract a little bit given the spending, or how should we consider that?

M. Vijay Kumar, CFO

I don't want to speculate too much on forward-looking statements. However, based on our current visibility, we should be able to maintain the EBITDA margin unless the pandemic escalates and presents different implications. But so far, we expect to get better with scale, and you've witnessed our EBITDA margins improving gradually year-on-year. We've had nonlinear growth in EBITDA relative to revenue.

Gregory Burns, Analyst

Right. Okay. And regarding the data centers, can you provide an update on your existing network and the capacity utilization, as well as your plans for bringing on additional capacity throughout the year?

Kamal Nath, CEO

Unfortunately, due to the current COVID situation, we cannot provide a complete picture. However, we have great plans for the year. Currently, we have 10 data centers, and we are in the process of building 4 more data centers over the next 18 months. These will continue, but readiness for operations may be affected depending on lockdown circumstances. Overall, the growth of digital transformation in India appears robust. While COVID presents challenges, the demand for digital transformation is accelerating across the country. Over the next four to five years, we believe our data center business could grow by 3 to 4 times.

Gregory Burns, Analyst

Okay. All right. Regarding how COVID is impacting your business—does it more likely slow project cycle times? Will that affect the Technology Integration Services side of the business? Or do you expect it to slow growth in data centers and cloud until some lockdown measures are lifted?

Kamal Nath, CEO

Yes. While project cycles may slow down a little, the overall lockdown will affect business growth. Yet, as companies adapt to the lockdown, they continue to focus on digital transformation. Businesses are adjusting and moving towards a more digital approach. Banks, for example, are operating, and they are integrating new technologies to transition towards a digital future. So overall, we see growth potential, but the extent to which COVID is posing challenges remains unclear at this point.

Operator, Operator

Our next question today is coming from Jon Atkin at RBC.

Jonathan Atkin, Analyst

Continuing on the data center theme, I'm interested in the mix of demand you're seeing between Indian enterprises and hyperscalers. How is that shifting? Is there any change in the activity level concerning either procuring capacity or moving in equipment on the part of the international hyperscalers in India?

Kamal Nath, CEO

Jon, we are observing the same demand as before. Hyperscalers are growing well, and the adoption of hyperscalers and public clouds by Indian enterprises is accelerating every month. At the same time, the adoption of hybrid solutions is also increasing. We see nice growth with demand potentially at 70-30 or even 80-20 regarding adoption. While there may be slight slowdowns in coming months due to COVID, we do not expect any long-term changes in the adoption rate between hyperscalers and hybrid clouds. We expect continuous growth in demand for data centers as India's digital transformation journey is only at its infancy stage, with data centers acting as the backbone.

Jonathan Atkin, Analyst

A couple of weeks or maybe a month ago, there was an announcement with AMS-IX. How does that benefit your business? Is it more of a marketing benefit? Does it specifically improve the network business, or does it bring more attraction for your data center services? How should we evaluate the economic impact? Or is it too early to assess?

Kamal Nath, CEO

It's too early to assess from a numbers point of view, but concerning benefits, it's indeed about marketing. It's about how we position our data centers compared to other providers. Additionally, we are integrating our network solutions with our data centers. Therefore, cloud is not merely about data centers; it involves both data centers and networking together. Our strategy focuses on combining data centers with networking, establishing a unique position for Sify to offer comprehensive solutions that include both.

Jonathan Atkin, Analyst

Lastly, regarding partnerships, there have been recent announcements about partnerships where international companies are collaborating with Indian conglomerates to develop data center businesses. Given that these projects can be capital-intensive, how does that appear as an option for Sify?

Kamal Nath, CEO

We have always been open to partnership opportunities. So far, Sify has demonstrated strong financial standing, as Vijay Kumar mentioned. We will continue to invest as required, and we also don't face challenges with obtaining loans. We remain on the lookout for data center partners that can add value to our collaborative propositions. Many prospective partners engage with us, and we seek the right partnerships in this evolving landscape. In terms of existing strength, we have established ourselves in the data center sector for 20 years, being one of the first Tier 3 data center providers in India, with 10 data centers serving 3 hyperscalers in the country. We do not require an international brand to legitimize our data center business, which differentiates us from newer players.

Operator, Operator

We have no further questions in the queue at this time. Do you have any closing comments you would like to finish with?

Kamal Nath, CEO

Thank you. The entire Sify family offers its condolences to those who have lost loved ones during the pandemic. Please continue to wear masks and protect yourselves and everyone else. Thank you for your time.

Operator, Operator

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