Earnings Call Transcript - SIFY Q2 2023

Operator, Operator

Greetings. Welcome to the Sify Technologies Financial Results for Second Quarter Fiscal Year 2023 through 2024. Please note, this conference is being recorded. I will now turn the conference over to your host, Praveen Krishna. You may begin.

Praveen Krishna, Host

Thank you. Good morning, and 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 my Chairman, Raju Vegesna; my Executive Director and Group CFO, Mr. M. P. Vijay Kumar; and my CEO, Mr. Kamal Nath. 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'd like to point out that certain statements contained in the earnings release and in 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 my Chairman, Mr. Raju Vegesna. Chairman?

Raju Vegesna, Chairman

Thank you, Praveen. Good morning, and thank you for joining us on the call. India's data policy is entering into the final phase of being adopted into the law. This will give a shape and clarity of data localization and formalization regulations around data security, which will help accelerate investments in India's data center landscape. This will also lead to India being viewed as a more viable interconnect point between Asia and the Middle East by international connectivity players. Enterprises are continuously exploring digital transformation, and government entities looking to automate the scale social welfare systems will be an important target audience for Sify’s digital transformation and service tools. Let me now bring Kamal, our CEO, to expand on some of the business highlights in the past quarter. Kamal?

Kamal Nath, CEO

Yes. Thank you, Raju. As enterprises pursue their digital transformation and digitalization objectives, they are also recalibrating their digital infrastructure across hybrid cloud, network security, and edge infrastructures. Our customer experience, business continuity, cybersecurity, application modernization, and overall adoption of AI models are the prime drivers for this recalibration. Our infrastructure investments and services portfolio are fundamentally aligned to meet customer goals. Simultaneously, we are continuously engaged with our customers to identify their specific needs and selectively recalibrate our propositions to support the same. Let me now expand on the business highlights for the quarter. The revenue split between the businesses for the quarter was Data Center Colocation Services at 31%, Digital Services at 28%, and Network Services at 41%. During the quarter, Sify added 1.2 megawatts of new data center capacity. As of September 30, 2023, Sify has deployed 6,535 SD-WAN service points across the country. Sify now provides services via 952 fiber nodes across the country, which is a 14% increase over the same quarter last year. During the quarter, Sify invested USD 1.5 million in startups in the Silicon Valley area as part of our corporate venture capital initiative. To date, the cumulative investment stands at USD 7.07 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 Group CFO, to elaborate on the financial highlights for the quarter. Vijay?

M. Vijay Kumar, Executive Director and Group CFO

Thank you, Kamal. Good morning, everyone. Let me briefly present the financial performance for the second quarter of financial year 2023/'24. Revenue was INR 8,791 million, which is an increase of 11% over the same quarter last year. EBITDA was INR 1,519 million, a nominal increase of 1% over the same quarter last year. Profit before tax was INR 52 million, a decrease of 76% versus the same quarter last year. Profit after tax was INR 15 million, a decrease of 87% versus the same quarter last year. Capital expenditure during the quarter was INR 1,797 million. We continue to make substantial investment in capacity creation across data centers, network expansion, and people to build skill sets for IT services opportunities we foresee given the digital transformation engagements that India Inc. is actively pursuing. This has led to the accompanying depreciation and interest cost reflecting on our net profit. We are also actively scaling up our sustainable measures across all businesses, especially our data centers. The cash balance at the end of the quarter was INR 7,570 million. I will now hand over to our Chairman for his closing remarks. Chairman?

Raju Vegesna, Chairman

Thank you, Vijay. Enterprises in India are aggressively pursuing a digital transformation model for their businesses. In their search for partners, they'll look for service providers who will bring a value proposition to the table. Our converged ecosystem and our digitally enabled services are evolving to be the answer to most of their business needs. So we have a great opportunity across India and that’s the way we are looking at. Thank you for joining us on this call. I will now hand over to the operator for questions. Operator?

Operator, Operator

Your first question for today is coming from Jon Atkin at RBC Capital Markets.

Jonathan Atkin, Analyst

I wondered if you could talk a little bit about AI demand in India, and anything that you're seeing differently than 3 months ago, 6 months ago in terms of overall demand in the market? And then what implications it has for maybe your capital deployment going forward and your strategy for taking advantage of that demand?

Raju Vegesna, Chairman

Jon, this is Raju. To answer, I'll make it into two sections. First, if you look at AI/ML adoption in India, it is in every discussion we are having with any enterprises or even in the government; there is a talk about AI/ML adoption in their businesses. So that is given. Whether you look at how they want to run their network operation, their digital services, or their data centers, there are AI/ML opportunities present. Customers are looking at how to adapt AI/ML tools for their business. Second, due to the growth of AI/ML, we are seeing an increase in capacity required for the data centers, which is a positive uptick in the market. This is beneficial for Sify in both our digital services and network infrastructure point of view, as well as our data center expansion. Overall, in India, AI/ML is an important topic, and every customer is interested in how they can adopt AI/ML tools and technology across the board.

Jonathan Atkin, Analyst

To the extent that you are going to directly try to meet that demand by providing capacity for large language models and so forth, I wondered what implications that might have for your capital budget and even your design, given the higher density requirements that one typically associates with these needs?

Raju Vegesna, Chairman

All our data centers, especially the new ones, are equipped to support higher-density racks. Moreover, a lot of our data center capacity is going to be available soon. So we are in a very good position to meet the AI/ML demand, whether coming from hyperscalers or the Indian enterprise market. This is one of the considerations we are looking at as we invest in our data center and network infrastructure.

Operator, Operator

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

Gregory Burns, Analyst

Could you just update us on your roadmap for the new data centers? How much capacity you plan to bring online over the next year and the timing of that?

Raju Vegesna, Chairman

Greg, we will not forecast a lot of specifics, but as we've expanded before, we are bringing substantial capacity in the Mumbai market, as well as in our North India Noida market, and our Chennai market. This will all be available in the next 6 months across these three locations. We are also investing in our Hyderabad and Bangalore facilities. So we are investing in all five markets in India.

Gregory Burns, Analyst

Okay. How much capacity in the next 6 months will the Mumbai, Noida, Chennai sites add?

Raju Vegesna, Chairman

The capacity—there are two phases: one is physical location, and the other is the availability of the non-IT infrastructure. We will have probably a capacity north of 10 to 12 megawatts within the next 6 months. Our facilities can accommodate more than 100 megawatts of expansion across these three locations.

Gregory Burns, Analyst

Okay. So more than 100 megawatts total, but the 10 to 12 you mentioned is what exactly?

Raju Vegesna, Chairman

You build it by demand.

Gregory Burns, Analyst

Okay. Got it.

Raju Vegesna, Chairman

You develop it in phases. Campuses are designed with that in mind, and then you build according to what is required by demand.

Gregory Burns, Analyst

Okay. You have demand or you've sold 10 to 12 megawatts of that 100-megawatt capacity. Is that...

Raju Vegesna, Chairman

Yes, that either is sold or is being sold. Some of the things we build ahead of schedule, and that’s the way we look at it.

Gregory Burns, Analyst

Okay. All right. EBITDA was a little lower, and I was looking for this quarter. I guess SG&A rose a little bit more than expected. So could you just talk about what's driving that growth in SG&A? Is that a good level to model off of going forward? And I guess the EBITDA margin was down because of it this quarter. So is this a good level to think about for the business? Or do you expect that to increase as maybe some of the revenue on these new investments picks up?

Raju Vegesna, Chairman

We are doing new investments, and our digital services are getting back on track significantly. We are investing in our manpower and other activities to ensure all our three independent businesses grow exponentially fast. We are making forward calls and investments in these areas. That's the reason why our SG&A is higher. You may see a substantial reinvestment bump, but over time, it will be proportional to our revenues.

Gregory Burns, Analyst

Okay. And then the debt level, does that include all of the Kotak investment? Or has any part of that been reclassified as equity?

M. Vijay Kumar, Executive Director and Group CFO

We have to draw additional money anytime in April and before October 2026.

Gregory Burns, Analyst

Okay. And lastly, the Digital Services was up 25% in the quarter. What was the primary driver of that growth?

Raju Vegesna, Chairman

As I mentioned, once we separated our Digital Services, we increased focus significantly. Our infrastructure investments in network, data center colocation, network managed services, cloud, and application digital managed services are all seeing growth. We are continuously investing in all these areas. There is no single major deal that stands out, but overall, we see growth, and we are making significant efforts to drive that business.

Operator, Operator

We have reached the end of the question-and-answer session, and I will now turn the call over to Raju Vegesna for any closing remarks.

Raju Vegesna, Chairman

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

M. Vijay Kumar, Executive Director and Group CFO

Thank you.

Operator, Operator

Thank you. This does conclude today's conference call, and you may disconnect your lines at this time. Thank you for your participation.