Earnings Call Transcript - SIFY Q2 2022

Operator, Operator

Good morning, everyone, and welcome to the Sify Technologies financial results for the second quarter and fiscal year 2022 and 2023. I am pleased to hand it over to your host, Mr. Praveen Krishna from Investor Relations. Praveen, the stage is yours.

Praveen Krishna, Investor Relations

Thank you. 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 Mr. Raju Vegesna, our Chairman; Mr. Kamal Nath, Chief Executive Officer; and Mr. M. P. Vijay Kumar, Chief Financial Officer. 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 will have one sent to you. Alternatively, you may obtain a copy of the release from 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 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 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 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 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 Mr. Raju Vegesna, Chairman of Sify Technologies Limited. Chairman?

Raju Vegesna, Chairman

Thank you, Praveen. Good morning, everyone. Thank you for joining us on the call. India has displayed remarkable resilience against the global recession sentiment so far. This is due to the country's strong financial fundamentals and its attractiveness as a safe investment geography. The government has ensured that the economic agenda stays the course and the digital ambitions begin to deliver the intended social welfare gains. The influx of multinational companies is bringing both opportunities and technologies to our shores. Domestic enterprises and startups are banking on this positive sentiment to accelerate their digital transformation journey. The future is full of promises and possibilities. Let me now bring in Kamal Nath, our CEO, to expand on some of our business highlights for the past quarter. Kamal?

Kamal Nath, CEO

Thank you, Raju. Indian enterprises have fast-tracked their digital initiatives based on their success navigating the pandemic and are now operationalizing the 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, and we expect each one of the businesses to grow with the related investments by the customers. Let me now expand on the business highlights for the quarter. Revenue from Data Center Services grew approximately 38% over the same quarter last year. Revenue from Digital Services fell approximately 8% over the same quarter last year. Revenue from Network Services grew by 14% over the same quarter last year. Revenue split between the businesses for the quarter was Data Center colocation services at 32%, Digital Services at 25%, and Network Services at 43%. During the quarter, Sify invested USD 772,000 in startups in the Silicon Valley area as part of our corporate venture capital initiative. To date, the cumulative investments stand at USD 4.21 million. Sify commissioned incremental capacity of 5 megawatts at the Hyderabad data center in the quarter. As of September 30, 2022, Sify provides services via 834 fiber nodes and 1,880 wireless base stations across the country, a 10% and 2% increase, respectively, over the same quarter last year. The network connectivity services have now deployed 5,600 software-defined wide network service points across the country. 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 quarter. Vijay?

M. Vijay Kumar, CFO

Yes. Thank you, Kamal. Good morning, everyone. Let me briefly sum up the financial performance for the second quarter of financial year 2022, '23. Revenue was INR 7,938 million, an increase of 14% over the same quarter last year. EBITDA was INR 1,509 million, an increase of 2% over the same quarter last year. Profit before tax was INR 220 million, a decrease of 52% over the same quarter last year. Profit after tax was INR 112 million, a decrease of 69% over the same quarter last year. Capital expenditure during the quarter was INR 2,234 million. We are leveraging the demand to aggressively build capacity across our data centers. The investment into network and tools will be in synchrony with the demand without losing sight of fiscal discipline. With an increase in capacity utilization, we should see our digital services find demand and further contribute to the revenue mix. Cash balance at the end of the quarter was INR 2,775 million. I will now hand over to our Chairman for his closing remarks. Chairman?

Raju Vegesna, Chairman

Thank you, Vijay Kumar. Markets have always rebounded stronger after a lull. When that happens, enterprises will rush to make up for lost time. And in the process, look for partners and solutions that can support and accelerate their growth. We want to be that partner. Thank you for joining us on the call. I will now hand over to the operator for questions. Operator?

Operator, Operator

Your first question is coming from Jonathan Atkin of RBC Capital Markets.

Jonathan Atkin, Analyst

Two, if I could? So first of all, on kind of connectivity network solutions and how that plays into cloud adoption and usage in India? What are you seeing in terms of cloud on-ramp demand? How are you participating in terms of facilitating access to some of the major cloud providers: Oracle, Amazon, Microsoft, Google, and so forth? And any update on partnership arrangements with companies such as Megaport?

Raju Vegesna, Chairman

Jonathan, this is Raju. Sify is in a unique position to offer the data centers and the network. As you know, to provide the network in India, you need a license. And we came from the network business before the data centers. We understand the network business very well. So we are connected to probably 95% of the data centers across the country, and we have connected all the clouds in the country, not only to our data centers but also to other competitive data centers. What we are seeing is that we are winning when we are getting into the cloud. We are securing cloud connectivity and data center connectivity, which is growing. We believe this will grow substantially because after COVID, Indian enterprises are starting their real transformation; the migration to the cloud is just beginning across all hyperscalers and private models. In the last 4 weeks, I have visited more than 40 enterprise customers, and everyone is looking at cloud, whether it be a hyperscaler public cloud, a private cloud, or hybrid models. So as Indian enterprises move to the cloud, we see that the network will also grow in tandem with cloud growth. That's what we are seeing, and we are well-positioned to grow with the cloud penetration in the Indian enterprise market.

Jonathan Atkin, Analyst

So given your license and kind of preferred position as a neutral cloud neutral, data center neutral provider, are there any partnerships to call out from non-Indian, whether it's telcos, non-Indian network as a service providers, or other channel partners that you can maybe give us an update on, anything specifically that's having success that you can point to in terms of partnerships?

Raju Vegesna, Chairman

Yes, we are working on several partnerships that I cannot disclose at this point. However, we are engaging with parties outside India who view India as a growth story for them, as well as those who provide cloud ramps or Internet exchanges or cloud exchanges. We're collaborating with many of these organizations to bring them to India. They see India as a growth opportunity, and we are hosting them in our data centers while also utilizing our network facilities.

Jonathan Atkin, Analyst

And then on cloud and the hyperscale segment of the market, you have pointed to a large development pipeline of triple-digit megawatts that you plan to develop. How would you characterize the pace of absorption? In other words, over the next couple of years, how much do you intend to have sold of this large capacity in the pipeline and perhaps put this in the context of other players that are now more aggressively going into the market? You've got Adani, EdgeConneX, Digital Realty, Equinix; there are a lot more players, both domestic and international, that are in the market to accommodate that demand. How do you see that playing out? And any commentary on pricing that you're seeing for these deals given both increased demand and presumably increased supply?

Raju Vegesna, Chairman

Yes. India is still a growth story, and I see two aspects of the growth into the cloud. One is that India has a long way to go regarding IT adoption in enterprises. Secondly, people are transitioning to the cloud from on-premise data centers to colocation or moving to the cloud. I'm observing both sides contributing to growth, and this will bring India much faster growth in all the metros over the next several years. The only uncertainty is how the fluctuations in global markets will influence India's growth. However, I am confident that India will develop. As you mentioned, we are one of the top three providers of data centers in the country, and we are continually expanding. We have pioneered the first Tier 3 data center in India 20 years ago. Yes, there are opportunities, and global players are entering the market. We have our own intellectual property to differentiate ourselves in the global market. We host existing hyperscalers in our data centers and significant banks and enterprises in India. We maintain a solid customer base consisting of both hyperscalers and local enterprise businesses.

Operator, Operator

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

Gregory Burns, Analyst

What's driving the decline in digital services this quarter?

M. Vijay Kumar, CFO

Yes. So Greg, as far as the Digital Services business is concerned, one of the reasons for the decline is there are a couple of large digital transformation projects, which we have won just at the end of the COVID period. Those projects are in execution, and they are very complex. Revenue recognition will occur once these projects get completed. We have recognized all the costs associated with fulfilling this obligation as an expense, and the revenue will be recognized once we complete that performance obligation in the near future.

Gregory Burns, Analyst

Okay. And I guess that maybe partially answers my next question in terms of the EBITDA margin, which took a step back this quarter. Maybe this is partially the reason for it. Is there any other reason why the margin is down?

M. Vijay Kumar, CFO

No other reason. In fact, as we have done in the past, we continue to invest in our people's skill sets and our tools. So we are not overly concerned about the timing of revenue recognition. It’s crucial to build skill sets and capabilities for the future. The future looks very promising, given all three critical IT services we offer: converged service network, data center, and digital transformation services. Thus, we are not too worried about the reduction in the EBITDA margin in this quarter.

Gregory Burns, Analyst

Okay. I was just trying to understand more regarding the opportunity in the Data Center side of the business. You didn't give an update this quarter, but it was, I think, 11 data centers with 100 megawatts of capacity and you're looking to add another 200 megawatts over the next few years. Can you help us think about the revenue opportunity from that? Is it simple that you're increasing capacity by 3x, which would translate to 3x your Data Center revenue from here? Is there anything you could do to help us understand the revenue opportunity from the incremental capacity that you're bringing online?

M. Vijay Kumar, CFO

The new data centers are going live in the next fiscal year. Once the capacities go live, capacity consumption will begin. Some of the new capacities already have contracts in hand, so those revenues will start being recorded thereafter. Of the 200 megawatts we plan to add over the next few years, 100 megawatts will go live in the next 18 months, based on the pace at which customers consume the capacity. We are committed to increasing our capacity by 200% from where we currently stand.

Gregory Burns, Analyst

Okay. Are the customers you're signing up with these new data centers different from your existing customers? Is the pricing different? Is the revenue, I guess, per megawatt or however you gauge it, the same for the next 200 megawatts as it is for the existing installed base?

M. Vijay Kumar, CFO

For part of the capacity, it consists of similar contracts and existing customer relationships. However, as you know, we also have enterprise customers. The quality of data centers is improving, and incremental investments per megawatt are also higher. Consequently, going forward, the revenue realizations will also improve accordingly.

Operator, Operator

Gentlemen, there appear to be no further questions in the queue. I'll now hand back over to Raju for any closing remarks.

Raju Vegesna, Chairman

Thank you for your time on this call. We look forward to interacting with you throughout the year. From all of us here at Sify, wish you a very happy Diwali. Thank you.

Operator, Operator

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