Earnings Call: Q3 2021

Jan 28, 2021

Good day, ladies and gentlemen, and welcome to the Sify Technologies Financial Results for Third Quarter and Fiscal Year 2020 to 2021. At this time, all participants have been placed on a listen only mode and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Shiwei Yin. Sir, the floor is yours. 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 Vegizna, Chairman Kumal Nath, Chief Executive Officer and MP Vijay Kumar, Chief Financial Officer of Sify Technologies. Following their comments on 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 a copy of the release on the Investor Information section of the company's corporate website at www.citycorp.com. Some of the financial results referred to during this call and in the earnings release may include non GAAP measures. Citi'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 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, company seeks the protection before the Dubai 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 on 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 Vakizna, Chairman of Sify Technologies Limited. Sir? Thank you, Suye. Good morning, everyone. Wish you and your family 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 and Automation. And these are should be a long term trend that are increasingly becoming accepted as a mainstream technology. These trends continues to stimulate demand for our data center and our network capacity and the services around our data center centric and network centric businesses segment, the CP state formally committed to. So now I will ask our CEO, Kamal Nath to expand some of our business highlights for the past quarter. Kamal? Yes. Thank you, Raju. In continuation of signs seen in earlier quarters, we are seeing an aggression in customers' decision making and spend in areas of digitalization, business continuity plan, security and remote working models. They're also allocating budgets for financial year 2021, 2022 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 datacenter 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% 13%, respectively, while revenue from application integration services fell by 21%. Our 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 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 results in 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, etcetera, shifting the balance to 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 services 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 Cloudinfini, 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 and customers choosing Sify as their multi service digital transformation partner and also customers choosing Sify as their network transformation and management partner as they migrate to 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? Thank you, Kamal. Good morning, everyone. Allow me to sum up the financial performance for the Q3 of financial year 202021. Revenue for the quarter was INR 6,301,000,000 a growth of 7% over the same quarter last year. EBITDA for the quarter was INR 1291,000,000 an increase of 17% over the same quarter last year. Profit before tax for the quarter was INR400 1,000,000 an increase of 61% over the same quarter last year. Profit after tax for the quarter was INR 252 1,000,000, an increase of 54% over the same quarter last year. Capital expenditure during the quarter was INR 1140 1,000,000. Our data center and network expansion plans remain on track. We will continue to invest in people and tools while maintaining a tight fiscal discipline. Our discretionary spend will remain contained in the short run without impacting the overall customer experience. Cash balance at end of the quarter was INR 4431,000,000. I will now hand over to our Chairman for his closing remarks. Chairman? Thank you. Thank you, Vijay. India is in the middle of the largest vaccination drive globally. The proactiveness in early stage now vaccinating and is slowly bringing back the confidence into the market. Businesses are aggressively adopting technology to bridge customer gaps, which in turn built a large demand for digital transformation services. Our unique proposition of being convert ICT player offering all these services being it data centers, network or a data center centric or a network centric 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 operator for any questions. Operator? Thank Our first question today is coming from Greg Burns. Please announce your affiliation then pose your question. Good morning. It's Greg Burns from Sidoti and 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? Thank you. Vijay? 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 megawatt, 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 which are there, we are timing our capacity creation to meet the market demands by expanding the data center footprint in 3 cities Mumbai, Noida and Chennai. Okay. And then typically do you pre sell the capacity? How does it work? You're adding capacity. I'm assuming you're not going to build it and go for some pre selling going on. So how does that typically work? Sorry, Greg. No. It was also working for me. Greg, some of these things, yes, we are working, there are potential hyperscalers, potential for Indian market is available. And based on that only we are building in the 3 cities what is Vijay outlined in our Mumbai and NCR, the National New Delhi area and in Chennai, we are committed to build more data centers. Okay. And I guess given these plans, just an idea of what you expect CapEx to be over the next 12 months? Yes. For the next 12 months, we would have a capital expenditure requirement of approximately $4,000,000 INR terms. Okay. All right. Thank you. And you mentioned the cash balance. What was your total debt balance at the end of the quarter? Our total debt balance in INR terms is 9,000 approximately. Okay. Thanks. And you mentioned, it seems like for your services covering from the part of the pandemic. But can you maybe just give us your view on what differentiates Sify? Why customers, businesses or government entities might turn to Sify over maybe another competitor in the market? Yes. Kamal, you want to address? Yes, sure, sure. So thank you for asking this question. Sify is in a very unique position because Sify has got all the right assets to move the customer from the older model of IT to a new model of cloud based IT. So our investments like data center, our own cloud, our partnership with hyperscale cloud providers and on top of that very significantly our network investments. These are all required to move the customers' IT from the old model to the new model. So there are very few customers, very few competition who has got all these different assets with them. And over and above, our own services capabilities of stuff like migration services, managed services, security services, because when they have to run it in a new scheme of things, all these assistance services are required. I think that way we are significantly and uniquely positioned as against our traditional competition in the individually in the data center space or individually in the cloud space or individually in the network space. Okay. And what are you seeing also? Okay. And I guess what are you hearing on or seeing on the ground and talking to your customers? Is your project pipeline increasing? Like what's the demand outlook here going forward? And have you seen a noticeable improvement since the beginning of the pandemic? Can you please repeat your question? Actually, I'm not sure why your voice is breaking or is it Vijay, are you able to hear him? Sorry, I can repeat it. I'm just asking about your project pipeline, what kind of demand you're seeing from your customers? I think, Greg, the pipeline looking promising. We cannot give the details of the forecast, but the trend is positive. Great. Okay, great. And then lastly, can you just remind us why the Application Integration Services is down? What's the primary drivers behind that? Sorry, voice was cracking for me actually. I heard something about application services. Voice was cracking. Yes. So why what's driving the decline in application integration services? Okay. Kamal, would you like to respond on that? What is contributing to decline in application led integration services? Yes, it is predominantly because of drop in the talent management business. I think it is predominantly because of that. So I mean, there's no other reason. But yes, our application businesses are also the cloud aligned application businesses has increased, but how were the traditional some of the traditional line items like talent management, but because of the bigger Ask Twil, bigger volume, that's why you can see a negative growth in the application services. Okay, great. Thank you, Ajay. Thank you. Our next question today is coming from Jonathan Atkin. Please announce your affiliation, then pose your question. Yes. Jonathan Atkin from RBC Capital Markets. A couple of questions about international demand into India and your press release mentions companies like Microsoft and AWS and Oracle. And I wondered, what are the trends that you are expecting overall for the Indian data center sector in terms of these hyperscalers growing their presence in India? Is it going to be through 3rd party data center providers? Or are they going to be building their own sites? How do you see that playing out over the coming several quarters? Hi, Jonathan, this is Raju. So India is a growth story for all the hyperscalers. I cannot name individually and we are working with every hyperscaler on the earth And every hyperscaler wants to come to India and they're growing. So one is, they're going to look at it in a different model, either they're going to look at in a build to suit certain hyperscalers. Certain hyperscalers are looking in a colo model. So they're contemplating depending upon what are the opportunities they're looking at. So there is an opportunity for data center providers like us to provide hyperscalers and it's very promising for the hyperscalers market in India. So I have a couple of follow ups. So since I think the last time we chatted, at least in this forum, Equinix has announced party. And given the interest level of, in this case, U. S. Companies making investments in India or at least plenty of the growth strategies, does that have any kind of strategic implications for the Indian based operators such as yourself? No. See, I think there are entities like foreign operators are coming, but also there is lot of Indian operators that are going. So, if you look at, Jonathan, the IT penetration in India is very small. So, the way I always give analog how the mobile took off in India, similarly, I believe the cloud will take off in India, either hyperscalers, public clouds or a private cloud or in hybrid. So, I believe hybrid is the way to go and people will not bet if you look at it, the I think the way if you look at it, the kind of markets you look at the retail and healthcare and education, all those things, how it's going online and you are going to see the tremendous demand for both data centers at the same time the network. So it's not just only the data centers, because data centers without a proper network, also it's going to be a bottleneck. So that is the reason we have we are in a unique position and there will be a couple of other people, but Sify is in a very good position having lag in both the hands both the sides, both in the data centers and the network. So that actually leads to my last question. So given the integrated services and solutions that you were able to offer, how do you think about the optimal revenue mix going forward? The CapEx number that you shared, a lot of that goes into building new inventory. And one could theoretically do a small number of very large deals for large customers, but perhaps with fewer services attached, but that moves the needle on revenues in a significant way or one can choose to fill it with maybe smaller enterprise and with more of a multifaceted solution, perhaps that's higher yielding. How do you balance the 2 in general? No, I think that's a very good question. But it's a balancing act, right? So the way we have is data center and we have a network and we have IT services, right? So, data center requires lot of CapEx we have to build, right. And also, when we are building these data centers, we don't need to invest everything in upfront. You build it in a modular approach, right? And so that is one way you will reduce putting money out upfront. Similarly in the network, then after the data centers, probably network business requires a lot of CapEx. We have to build our metro network, maybe some NLE network and cable landing stations, those kind of things too. It is we are not a mobile operator. We are same customer base where our OTT players and our hyperscalers require lot of the network. We are going to work with the same partners to enable our network business. And similarly, based on that network, we are going to enable our enterprise market, where we have a lot of customers servicing for the our BFSI sector, manufacturing and retail customers. Then the third one is our IT services, which doesn't need much CapEx and that is more of skilled manpower and that doesn't need more CapEx. So if I want to ratio probably 70% to 80% goes our CapEx into the data centers, probably about 20% to 30% goes into the network and maybe 5,000 goes into the IT services. That's the way I look at what we are going to spend on the CapEx. Thank you very much. Thank you, John. Thank you. We have no further questions in queue at this time. Do you have any closing remarks you'd like to finish with? Thank you for everyone for joining us on this call and we look forward to interacting with you through the year. Please stay safe, healthy and have a better year ahead. Thank you. 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.