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Sify Technologies Limited (NASDAQ:SIFY)

Q4 2017 Earnings Conference Call

April 25, 2017 8:30 AM ET

Executives

Shiwei Yin – Grayling Investor Relations

Raju Vegesna – Chairman and Managing Director

Kamal Nath – Chief Executive Officer

Vijay Kumar – Chief Financial Officer

Analysts

Kevin Dede – Rodman

Operator

Greetings and welcome to the Sify Technologies Financial Results for Fourth Quarter of Fiscal Year 2016-2017 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Shiwei Yin.

Shiwei Yin

Thank you, Barack. I would like to extend a warm welcome to all of our participants on behalf of Sify Technologies Limited. I’m joining on the call today by Raju Vegesna, Chairman; Kamal Nath, Chief Executive Officer; and M.P. Vijay Kumar, Chief Financial Officer of Sify.

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 me at 646-824-2857 and we can 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.sifycorp.com. 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 representation 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 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. Raju?

Raju Vegesna

Thank you, Shiwei. Good morning. Thank you for joining us on the call. We have maintained our record growth for the fifth year. We continue to see a general trajectory of Enterprise clients moving towards a single-window service provider for execution of their critical IT transformation projects. Through our consistent delivery and demonstrated value, we now occupy a crucial position as a strategic partner in our client’s transformational journeys.

To-date, our investments in global markets have been cautious, yet promising. I am seeing a growing trend of clients moving away from large incumbent service providers and entrusting projects to a growing number of nimble, proactive service providers. Our suite of managed services and our offshore delivery capable – model capable should benefit from such changes.

I would now ask Kamal Nath, our CEO, to expand on some of the business highlights of the year. Kamal?

Kamal Nath

Thank you, Raju. We continue to see healthy growth in our order book and revenue, resulting from the investments we have made in both the size and expertise of our sales business and operations team. Over the past year, we have booked new orders that represent an Annual Contract Value in excess of INR 10,000 million.

A higher number of IT transformation projects have contributed to the revenue this year. There have also been deeper engagements with existing clients, in which we were better able to leverage multiple Sify services. As a result, we have been able to reduce our dependence on our traditional telecom services and significantly grow the contribution from IT services.

The increased mindshare that Sify enjoys from Enterprise customers was recently recognized when Sify was included on the list of India’s Superbrands, after an absence of 10 years.

Let me now spend some time on the business highlight for the past year. We’ll start with the telecom business. The revenue from data services for the year grew by 15% over last year. A total number of 950 clients were added during the year. During the year, Sify expanded its reach by adding 246 new sites.

The rollout of the next generation data network in Mumbai is now complete. The network was rolled out using the next generation DWDM equipment, providing customers with a highly resilient network to support data center-to-data center and cloud traffic.

Sify launched a unique Internet Exchange in partnership with global pioneer AMS-IX Internet Exchange. This multi-location Internet Exchange fabric will provide cloud and content players, as well as India service providers, a neutral interconnection platform for IP and private traffic.

This year saw Sify establish dominance in the nascent Payments bank industry in India. Sify also launched its Enterprise grade Managed Wi-Fi solution, offering New Age Connected Solutions to Enterprises going Digital. Major wins this quarter included a Public-Sector bank in the South and another Payments bank in the North.

Multiple customers contracted for Managed Wireless LAN services, including a large global manufacturing company and a Public-Sector bank. Our SMACnet was chosen as the Most Innovative Offering of the year by a leading industry media.

Data center services business unit; the revenue from this business unit services grew by 29% over last year. Sify added 36 new clients for data center services across various industries.

Sify commissioned a primary data center for a public sector insurance company along with near DR and far DC to be housed in Sify’s data centers. Sify’s data centers now host network POPs for several global content players. This has led to significant orders for peering from Indian telecom operators and ISPs.

A national level private insurance company’s data center was successfully migrated to Sify’s data center. Sify was awarded the CIO choice award 2016 for integrated data center solutions and data center transformation services.

Cloud and managed services unit; the revenue from cloud and managed services business unit remained flat versus the prior year. One of the world leaders in medical devices and software for oncology signed up to set up their first facility in India on our private cloud. This contract includes software, infrastructure and connectivity.

A leader in creating and operating next generation technology-centric financial exchanges contracted for multiple cloud managed and security services, including the newly launched GoInfinit Acceleration services.

One of the largest luxury real estate players will migrate their entire database to our cloud environment. This contract also includes connectivity among different ongoing projects. A three-wheeler manufacturer signed up for a similar cloud setup to optimize and leverage their existing investments. 18 new clients were added during the last quarter and nine new partnerships were signed during the year.

Applications integration services; applications integration services grew by 100% over the previous year. The talent management line of business showed robust growth with over 10 million assessments conducted over the past year; largest among them was the nation-wide recruitment examination for the Government of India, for which 6.5 million candidates registered.

A total of 16 new clients signed up for forum, talent management and e-learning services. One of our major forward supply chain customers have extended their contract by three years. Sify signed 12 new clients for the SAP business and six new clients for Microsoft Azure business. Sify also acquired their first SAP Business Warehouse on Cloud Client for the subsidiary of a major IT player.

Key wins include an engineering and construction arm of one of the largest Government employers and a public sector bank that contracted the business to upgrade and consolidate their database using a combination of open source and old SQL versions. Sify was accorded the Hosting Partner of the year for 2016-2017 by Microsoft.

Transformation integration services unit; the revenue for transformation integration services has grown 55% over last year. Sify added 62 new clients across data centers, IT, network integration, security and collaboration services. A large public sector insurance company has contracted with Sify to deploy and provide Infra Integration services for data center network, IT infra compute and storage, and security services.

Another large public sector insurance company and public sector bank has contracted with Sify to refresh WAN network infrastructure across India. A private insurance company has contracted with Sify for a data center transformation project to design, deploy, host and migrate existing data center services to a new platform along with managed services for DC and DR. A large public sector bank has contracted with Sify to establish a data center and network infrastructure across all their locations.

Sify won a large contract from a public sector oil and gas company to establish a data center infrastructure. Sify also won a large contract from a State Government to establish an end-to-end data center infrastructure, which includes design and setup of IT, network and security, and managed services platform.

I will now hand over you to Vijay, our CFO, to expand on the financial highlights of the year. Vijay?

Vijay Kumar

Thank you, Kamal, and good morning everyone. I will now provide detailed financial results for the financial year 2016-2017.

Revenue for the year ended March 31, 2017 was INR 18,432 million, an increase of 23% over last year. EBITDA for the year was INR 2,570 million, an increase of 5% over last year. Net profit for the year was INR 642 million, an increase of 47% over last year. Capital expenditure during the year was INR 1,669 million.

Last year, in a continuing practice of investing ahead of the curve, we enhanced our telecom and data network capacity by four times. This reflects our confidence in the underlying market growth, although it has some pressure on margins in the short-term due to increased bandwidth cost for capacity creation.

Another significant investment has been in people and process to support the application side of the business in particular. In doing so, we seek to carry forward the momentum built in leveraging on the Digital India projects of the Government of India.

In our recent interaction with financial institutions and investors, the investment criteria, fiscal discipline and current business model were viewed positively. We intend to maintain the discipline as we continue to scale up our business.

I’m pleased to state that the Board of Directors today have recommended a dividend of 12% on the paid up capital, involving the payout of INR 210 million. Cash balance as of the end of the year was INR 1,884 million.

I will now hand you over to our Chairman for his closing remarks. Chairman?

Raju Vegesna

Thank you, Vijay Kumar. We are at a juncture where the country is witnessing a major disruptive technological advice. The Government’s focused on going Digital is giving rights to a large scale automation platform and opportunities. If our current sector is anything to go by, we are at the right place at the right time.

And thank you for joining us on this call. I will now hand over to operator for questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] Our first question today comes from Kevin Dede of Rodman. Please go ahead.

Kevin Dede

Hello, gentlemen. Thanks so much for taking my question and congratulations on the nice results. A couple of things; one, just on margin, it seems to me that gross margin was down in 2016 versus 2015 albeit, I think 0.5 percentage point, but operating margin was consistent. And I’m just wondering what the big drivers were there from a business avenue perspective, please?

Kamal Nath

Thanks Kevin, happy to connect with you again. On the margin, your observation is right, as far as the reduction in gross margin is concerned it is partly due to the reason which I highlighted that is increase in the bandwidth capacity cost, consequent to our increase in the overall network size by almost four times. So that is the predominant reason why we have a small drop in the gross margin.

Kevin Dede

Okay, fair enough. The big question, it’s always been the room question and I know you touched on a little bit, but if it’s – the perception and the competitive action and the overall market against the heavyweight, Bharti, Tata, Reliance. I’m wondering if you could you share a little color on how you’ve seen competitive dynamics change over the past 12months?

Raju Vegesna

So Kevin, our point of view is, there is always a competition and we have our own niche. See, when it comes to data, I think we are barred to none, we will stand against any of these competitions you mentioned. So I think the way we see the potential for Sify when it comes to the data network expansion, it continues to grow and there will be a healthy competition and we are planning to continuously grow agonist to that.

In anticipation of that we’ve invested like Vijay Kumar has mentioned about the bandwidth, so we invested our network expansion and we are continuously investing and as a growth story for India, we believe that’s going to be continuously our share of the market will increase.

Kevin Dede

So to go in a little deeper, do you see the main competitors making the same level of investment in the same niches of the market that you’re trying to address?

Raju Vegesna

So I cannot comment what is – they have investments in their mind, but when it comes to the data we find ourselves as a niche for us and some of these players have some other businesses. So, I don’t know what is their strategy to develop this market because they have other competitions; wireless and other aspects of it. So it is unclear to me what is their plans to go in this Enterprise market, but Sify is in a unique position to target and invest in this market as a growth player.

Kevin Dede

Very good, okay. Last question from me is, can you talk a little bit about how your CapEx breaks down. How much is in facility versus equipment?

Kamal Nath

Yes. As far as capital expenditure is concerned, almost whole of the capital expenditure last year is towards equipment both data center equipment and the network upgrade, both of them. The investment in the facility, that is the real estate is marginal, it is just about INR 300 million.

Kevin Dede

Okay. Very good gentlemen, thank you very much for addressing my questions. I appreciate it greatly.

Raju Vegesna

Thank you.

Operator

[Operator Instructions] There appears to be no further questions at this time. I’ll now turn the conference back over to the Chairman for closing remarks.

Raju Vegesna

Thank you, everyone for joining us on the call. And we look forward to interacting with you in the coming quarter. Thank you and have a good day.

Operator

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.

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