Sify Technologies Ltd (NASDAQ: SIFY) Q4 2020 Earnings Call Transcript

Sify Technologies Ltd (SIFY) Q4 2020 earnings call dated May 05, 2020

Corporate Participants:

Shiwei Yin — Grayling Investor Relations

Raju Vegesna — Chairman & Managing Director

Kamal Nath — Chief Executive Officer

M P Vijay Kumar — Chief Financial Officer

Analyst:

Greg Burns — Sidoti & Company — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, and welcome to your Sify Technologies Financial Results for Fourth Quarter and Fiscal Year 2019-2020 Conference Call.

[Operator Instructions]

At this time, it is my pleasure to turn the floor over to your host, Shiwei Yin. Sir, the floor is yours.

Shiwei Yin — Grayling Investor Relations

I would like to extend a warm welcome to our participants on behalf of Sify Technologies.

I am joined on the call today by Raju Vegesna, [Phonetic] Chairman, Kamal Nath, Chief Executive Officer, and M P Vijay Kumar, Chief Financial Officer of Sify Technologies. 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 let us know and we will have one sent to you. Alternatively, you may obtain [Technical Issues] 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 sifycorp 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 available on Sify’s [Technical Issues] I would like to point out that certain statements contained in the earnings release and on today’s 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 the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks included a variety factors, including competitive developments and risk factors, listed from time to time in the company’s SEC reports and public releases. [Technical Issues] 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 present a complete list of all risks and uncertainties inherent in the company’s business.

Now I would like to introduce Mr. Raju Vegesna, Chairman of Sify Technologies. Sir?

Raju Vegesna — Chairman & Managing Director

Thank you, Shiwei. Good morning, and thank you for joining us on this call. I trust you’re all staying safe.

Every adversity presents an opportunity to rethink the way we do the business. For some time now, Sify has been increasing the level of automation across our entire suite of service. And during the ongoing lockdown period, we have been able to perform remote commissioning and maintain high service levels without any major impact. I am sincerely proud of my team, who are continuing to working — taking the — clean up the — rise up to the challenges faced by our clients every day. The biggest lesson from this market from this lockdown is that there is no escaping the digital economy for tomorrow. Sifi’s future is in enabling that for our clients.

Let me now bring in Kamal, our CEO, to expand on our business performance for the past year. Kamal?

Kamal Nath — Chief Executive Officer

Yeah. Thank you, Raju.

The current scenario under lockdown has created challenges in the short term and opportunities in the medium and long term for us. As a service providers, we are currently addressing the upgrade and downgrade requirements of customers based on their demand. We are remotely managing mission-critical infrastructure of customers who are serving the core industries and consumers. The current situation has also stimulated conversation with customers on the need for scalable, flexible IT infrastructures, which can be consumed on demand. We are seeing the cloud-skeptical customers showing enthusiasm on cloud adoption to ease their capex cost and cash flow. Organizations are reviewing how to provide secured and productive work-from-home deployment.

As a digital ICT service provider, we see this as an opportunity to further boost utilization of our investments and enhancement of our services revenue. In line with the continuing precedent, I would like to expand on the business highlights and our growth drivers. Revenue from data center-centric IT services grew by 3% over last year. Segment-wise, revenue from Data Center Services grew by 21%, Cloud and Managed Services grew by 9%, while Technology Integration Services and Applications Integration Services fell by 13% and 2% respectively over last year. Revenue from Network Centric Services grew by 9% over last year. Segment-wise, revenue from Data and Managed Services grew by 12%, and Voice business grew by 4% over last year.

The current situation resulting from the nationwide lockdown has curtailed industry growth, and we expect customers to spend mostly on must-have services and not on nice-to-have services as we emerge from the lockdown. Customers will look for technology and contracts which are flexible and agile. Overall, service providers whose business models are consumption-based will get more attention from customers. Service providers who can deliver cost benefits will have an advantage in customer engagements more than ever. Cloud services, network access services, security services and e-learning will be the prime growth area for Sify, albeit post long term. Let me summarize the categories of customers who signed up with Sify during the quarter.

Customers choosing Sify for migration of their on-premise data center to multi-cloud platforms like Cloudinfinit, AWS and Azure. They also entrusted Sify with management and security. Customers choosing Sify as their data center hosting partner as they embrace hybrid cloud strategy. Customers choosing Sify as their digital services partner, and customers choosing Sify as their network transformation 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 year. Vijay?

M P Vijay Kumar — Chief Financial Officer

Thank you, Kamal. Good morning, everyone.

Allow me to present the financial performance for the full financial year 2019-’20. Revenue for the year was INR22,952 million, an increase of 7% over last year. EBITDA for the year was INR4,076 million, an increase of 31% over the last year. Considering IFRS 16 leases adoption from April 1, 2019, the increase in EBITDA is 17% on comparable basis. Net profit for the year was INR706 million, a decrease of 34% [Phonetic] over last year. Capital expenditure spent during the year was INR4,405 million. We had a reasonably good year 2019-’20. The EBITDA growth of 17% has been healthy, while we continued to spend for the future, both in people and tools to increase our digital transformation services capabilities.

The net profit is lower as the company is now subject to full taxes as past tax benefits have expired. As global trade shrinks substantially and overall demand and supply chain recovery is expected to take time, we are preparing the organization for new contracts to be slow to conclude as some of our clients are likely to take time to regain their momentum in the market. We continue to carefully manage our costs while ensuring that services to customers and their experience remains the best. We’re still committed to our data center, cloud and network-centric expansion projects, and will exercise due caution in terms of both timing and cost structure of these projects.

Considering the economic conditions and uncertainty on timing of the economy normalizing, the Board did not recommend the payment of dividend this year, and instead, advised the capital to be conserved and used for financing expansion projects. Cash balance at the end of the year was INR2,651 million.

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

Raju Vegesna — Chairman & Managing Director

Thank you, Vijay.

The post-COVID economy is going to be completely newer. While the truth is that nobody can forecast how it will be turn out to be, the advantage for Sify is that the entire breadth of our service portfolio will be in demand. The priority right now is safeguard our assets, people, tools and customers’ business.

I’ll now hand over to operator for questions. Questions, operator?

Questions and Answers:

Operator

[Operator Instructions]

We will take our first question from Greg Burns with Sidoti & Company. Please go ahead, sir.

Greg Burns — Sidoti & Company — Analyst

Good morning. Just first, what was the debt balance at the end of the year?

M P Vijay Kumar — Chief Financial Officer

Pardon, I couldn’t hear you.

Greg Burns — Sidoti & Company — Analyst

The debt balance at the end of the year?

M P Vijay Kumar — Chief Financial Officer

Okay. The debt balance, both the term debt, is about INR68 million [Phonetic], and working capital debt, net of cash — working capital debt, net of cash, is about INR25 million.

Greg Burns — Sidoti & Company — Analyst

Okay. And the capex number that you mentioned, the INR4,405 million, was that for the full year? Or was that just for the fourth quarter?

M P Vijay Kumar — Chief Financial Officer

It was for the full year.

Greg Burns — Sidoti & Company — Analyst

Full year. Okay. And when we think about this year, obviously, you’re conserving some capital, not paying — deciding to not pay the dividend. What are your projections for capex for this year? Is it going to be higher or lower, or about the same level?

M P Vijay Kumar — Chief Financial Officer

We have, as a policy, not make forward-looking statements. But as far as our commitment for expansion on our data center and network services, we will continue with our plans, which are on the drawing board. Maybe there could be some timing delay of a quarter or two. But otherwise, we are committed on our plans, similar to what we have done in the recent past.

Greg Burns — Sidoti & Company — Analyst

Okay. And then as we look at the impact that the virus — the lockdown is having on the business, can you just talk about maybe what parts of the business are being most impacted? Is it the more project-based areas of the business? Can you maybe just go through your different segments, talk about what you’re seeing, what the impact has been? And maybe highlight those that are maybe more or less impacted by the virus?

Raju Vegesna — Chairman & Managing Director

Yeah. Kamal, I think this is a good question for you, Kamal.

Kamal Nath — Chief Executive Officer

Yeah. Thank you, Raju. So what we have done is we have analyzed the vertical view as well as the — our product line view of this particular issue. So from a vertical perspective, we see banking and securities, which is a little negative on an immediate term, but over a long term, we see that it should be neutralized. The communications sector, and particularly the sector where we belong to as a company, that is expected to show positive growth. Sectors like education, health care, that will grow as far as the digitalization initiatives are concerned.

Insurance will take — insurance and manufacturing will take a little hit in the short term, but long term, we expect, again because of digitalization effort, which is happening to be neutral, which will basically cover up the current issue — the current shortcomings. Retail will be a challenge as well as transformation and hospitality sector. So this is how — what we find now.

But the good news is for us that the segment which constitutes most part of our revenue, both — and the new business, which is banking, finance and securities, that is the same, including insurance and communications, they add — as well as certain sectors of health care and insurance, those are going to recover from here. Or those will continue to grow because of the digitalization initiatives that the customers have to take. So overall, I think we are better off than many other industries as far as the verticals are concerned.

From a — for example, from a services portfolio perspective, we see growth of our cloud and data center services, which we are bullish. And the whole industry bullish about that, we are no exception. Network services, we’ll see a shift in pattern where more bandwidth will get consumed because of work from home, the culture which will be more and more prevalent in the coming days. It is already on. It is only going to be stronger and only going to be going to be deployed in a very structured way. So there, we see, although there were deep initiative for companies like us who are mostly in the B2B space, little negative to start with, but it will get neutralized because more bandwidth will get consumed among data centers and — including [Phonetic] data centers and cloud.

Application and digital services, we also see neutral growth for us, although digital as an offering for those companies, which are much bigger than us in the digital space, they are talking about positive growth. But our build business, which is the TIS business, we are expecting a dip in that, because customers will be very off, not investing in capex and to also hold back the cash and rather go for consumption-based models rather than buying hardware and infrastructure, and making upfront investments. But that’s the biggest lesson where the customers have probably — has experienced, like there is no point in investing upfront in creating large infrastructure themselves, where it’s better to consume infrastructure as a service or platform as a service from people like us.

So overall, it’s a mixed bag, but we see little — it is tilted towards the neutral and positive side. I hope I’ve been able to answer your question.

Greg Burns — Sidoti & Company — Analyst

Yeah. Yeah, no, that was great. So just I guess if we just — I know you don’t give guidance, but maybe you can help us out a little bit just given the level of uncertainty out there. But as we take everything you just said about your different business segments, and we look into next year, do you still expect to grow next year? Or what’s your view for this fiscal year in terms of the ability to still grow in this environment?

Kamal Nath — Chief Executive Officer

So it is a very tough question to answer very honestly at this point of time. A large part of our revenue is out of contracted and carry forward, which is more of an actual revenue. I would say very near to our current revenue, we are maybe 25% lesser than what we have achieved this year, or maybe 20% — not 20%, I’m sorry, maybe 15% of less — less than what we have achieved this year is expected to be our assured revenue next year. But of course, if we have a growth aspiration, then even under the condition, we need to do new business. So a lot depends on how much of new business we’ll be able to acquire and convert that into revenue. So the dependency is more on that.

Raju Vegesna — Chairman & Managing Director

See, Greg, to answer your question, Greg, in overall, right. So India is locked down, and we don’t know when is this whole thing will be unlocked, right. Second, how the spending is going to be across the businesses, right. So post-COVID, we have to analyze, probably, once we get to the back to the normal life, right. And third, everybody projecting, India has a lot more potential, a lot of manufacturing is going to move to India, a lot of the things, blah, blah, blah, and all those things. We need to analyze those situations to give understanding how the India — if India grows, we will grow, right. So that’s the way we look like. So the overall global India economy, we are depending on how this post-COVID is going to be turned out. That is going to play a big role in our expansion.

Greg Burns — Sidoti & Company — Analyst

Okay. And just — maybe just lastly, just to help me fully understand this. When we look at the complexion of your business, how much is tied to like contracts, which should recur — like, I don’t know, tied to contracts that should be more recurring? How much is consumption-based, which may decline? And maybe how much is kind of a capex project-based? Can you just maybe help us understand the mix of your revenue? And how much of that is maybe more stable and recurring than project-based?

Raju Vegesna — Chairman & Managing Director

Yeah. Vijay, you have an idea?

M P Vijay Kumar — Chief Financial Officer

Yeah, yeah, yeah.

Kamal Nath — Chief Executive Officer

Raju, can I answer the question [Phonetic]?

M P Vijay Kumar — Chief Financial Officer

Yeah, yeah. Kamal sir, Kamal, shall I?

Raju Vegesna — Chairman & Managing Director

Yeah, go ahead, Vijay.

Kamal Nath — Chief Executive Officer

Yeah, sure.

M P Vijay Kumar — Chief Financial Officer

Yeah. So as far as our revenues are concerned, I would draw your attention to our 20-F and the half yearly 6-K filing, where we have the segment numbers. The network and the data center business is almost in full annuity revenues, which are contracted, and they increase with the consumption. As far as the other IT services business is concerned, a little over one-third is annuity revenue is there.

Greg Burns — Sidoti & Company — Analyst

Great. Thank you.

Operator

[Operator Instructions]

And sir, at this time, we have no one further in the telephone queue.

Raju Vegesna — Chairman & Managing Director

Thank you for joining us on this call. And again, once again, please stay home, stay safe. Thank you.

Kamal Nath — Chief Executive Officer

Thank you, everyone.

M P Vijay Kumar — Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]