Earnings Call Transcript - SIFY Q3 2023

Operator, Operator

Greetings. Welcome to the Sify Technologies Financial Results for Third 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, Holly. On behalf of Sify Technologies, allow me to wish you a very Happy New Year. I'm joined on the call today by Raju Vegesna, 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 will have one sent to you. Alternately, 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 GAAP measures and of the differences between such 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 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. Chairman?

Raju Vegesna, Chairman

Thank you, Praveen. Good morning, everyone. Thank you for joining us on the call. A combination of pro-industry regulatory initiatives in India and an encouraging investment climate and a lot of skilled human capital are factors that continue to dominate enterprise business strategies for India. Business leaders are united in their view that India is central to their growth plans and are aggressively ramping up their local investments. Let me bring in Kamal, our CEO, to expand on some of the business highlights for the last 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. 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 the customer goals. Simultaneously, we are continuously engaged with our customers to identify their specific needs and selectively recalibrating 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 32%, Digital Services at 28%, and Network Services at 40%. As of 31st December 2023, Sify has deployed 6,920 contracted SD-WAN service points across the country. Sify provides services via 974 fiber nodes across the country, a 15% increase, respectively, over the same quarter last year. This quarter, Sify invested USD 0.15 million in startups in the Silicon Valley area as part of our corporate venture capital initiative. To date, the cumulative investment stands at USD 7.22 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. Wish you all a very happy 2024. Let me briefly present to you the financial performance for the third quarter of financial year 2023-'24. Revenue was INR 8,659 million, a decrease of 3% over the same quarter last year. EBITDA was INR 1,689 million, an increase of 4% over the same quarter last year. Loss before tax was INR 20 million and after tax was INR 14 million. These are compared to a net profit in the same quarter last year with a substantially higher depreciation on account of ongoing infrastructure expansion projects and interest cost. Capital expenditure during the quarter was INR 1,087 million. We continue to invest in adding more data center capacity, extending our network footprint, and skilling our people on new tools. These investments are being made ahead of the curve and will reflect on our net profit in the near future. The interest on compulsory convertible debentures raised in our data center subsidiary for data center expansion has been accounted partly as equity in accordance with the GAAP and is recognized as an expense in the statement of income. The cash balance at the end of the quarter was INR 6,037 million. I will now hand over to our Chairman for his closing remarks. Chairman?

Raju Vegesna, Chairman

Thank you, Vijay Kumar. As you can see, our investments, both in capital and resources, are backed by our belief that the market is just warming up to our services. There is still a lot of runway, and we have the right portfolio of services. We just have to accelerate our engagements. Thank you for joining us on this call. I will now hand over to the operator for any questions. Operator?

Operator, Operator

Your first question for today is coming from Greg Burns with Sidoti & Company.

Gregory Burns, Analyst

Could you just give us an update on your current data center capacity? How many megawatts of capacity have you added in the quarter, and what your roadmap is for the rest of 2024?

M. Vijay Kumar, Executive Director and Group CFO

Yes, we have data center operational capacity across 6 cities and 11 facilities of about 100 megawatt. This quarter, in January 2024, we will be making another 38-megawatt facility operational. Apart from this, there are 2 other greenfield data center projects in Delhi and Chennai, which will go live in quarter 1 of fiscal '24-'25. In Phase 1, both of them will have a design capacity of about 26 megawatts each.

Gregory Burns, Analyst

Okay. So the 38 megawatts, is that in Mumbai? I think that's going to go online in this fiscal fourth quarter?

M. Vijay Kumar, Executive Director and Group CFO

Yes, it's going live in January 2024 this month.

Gregory Burns, Analyst

Okay. Great. With this capacity coming online, do you expect to see a little bit better operating or earnings leverage next year, given you're going to start generating some revenue from some of these investments you've been making?

M. Vijay Kumar, Executive Director and Group CFO

Yes, you're right. It should happen.

Gregory Burns, Analyst

Okay. Great. The decline in digital services this quarter, was that mainly driven by the technology integration services? Was it just the timing of projects? Is there anything else going on there that we should take note of?

M. Vijay Kumar, Executive Director and Group CFO

Two things. One is the timing of the existing projects in terms of effective handover to the customer. The second is a conscious change in the profile of the technology integration services project, where the focus is largely on projects that have a services component which is significant.

Gregory Burns, Analyst

Okay. So given that change, are you becoming more selective? How will that, I guess, translate into the P&L? Just lower growth, more selective higher-margin projects, is that what you're looking for now?

M. Vijay Kumar, Executive Director and Group CFO

Yes. It would basically mean fewer pass-through projects and more services projects, which should be higher-margin projects.

Gregory Burns, Analyst

Okay. Great. With the Kotak investment, how much have you drawn down on that? And how much remains available to you?

M. Vijay Kumar, Executive Director and Group CFO

We have drawn down a total of INR 1,000 crores, out of which INR 400 crores has been deployed for projects we have executed in the last couple of years. INR 600 crores is meant for new projects that we are picking up. And as per the arrangement, we are entitled to draw another INR 600 crores anytime up to October 2026.

Gregory Burns, Analyst

Okay. Perfect. You mentioned some positive industry regulations for you. I think one of those was the data security or data privacy regulation. Could you give us an update on that and any other pro-industry regulations that you might have been referencing in your prepared remarks?

M. Vijay Kumar, Executive Director and Group CFO

Yes. It is essentially the Data Protection Act, which is a material development. Apart from that, all the regulators have been encouraging enterprises to host their data within the country. There's also encouragement towards hosting these in clouds that are set up outside of their premises. So most of the banks and insurance companies are developing their digital transformation strategies to host in clouds that are largely private clouds, hosted with data center providers like us.

Gregory Burns, Analyst

Okay. What is the status of the Data Protection Act? Is it near the point of getting passed? Where is it in the process of being passed?

M. Vijay Kumar, Executive Director and Group CFO

The law is live as we speak. What is pending is the regulations relating to the implementation of the law, which should hopefully come in the coming months.

Operator, Operator

There are no questions in queue. The law is live as we speak. What is pending is the regulations relating to the implementation of the law, which should hopefully come in the coming months.

Raju Vegesna, Chairman

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

M. Vijay Kumar, Executive Director and Group CFO

Thank you, Holly.

Kamal Nath, CEO

Thank you.

Raju Vegesna, Chairman

Thank you.

Operator, Operator

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