Sify Technology (SIFY) Q2 2021 Earnings Call Transcript

Sify Technology  (NASDAQ: SIFY) Q2 2021 earnings call dated Oct. 23, 2020

Corporate Participants:

Shiwei Yin — Grayling Investor Relations

Raju Vegesna — Chairman & Managing Director

Kamal Nath — Chief Executive Officer

MP Vijay Kumar — Chief Financial Officer

Analysts:

Greg Burns — Sidoti & Company — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, and welcome to the Sify Technologies’s Financial Results for Second Quarter and Fiscal Year 2020-2021.

[Operator Instructions]

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

Shiwei Yin — Grayling Investor Relations

I would 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 Vegesna, Chairman, Kamal Nath, Chief Executive Officer, and MP Vijay Kumar, Chief Financial Officer of Sify.

[Operator Instructions]

[Technical Issues] press release, please let us know and we will 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.sifytechnologies.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 are according to the International Financial Reporting Standard, or IFRS. 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 made available on Sify’s website.

[Technical Issues] 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. [Technical Issues] 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. [Technical Issues] 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 completeness of all risks and uncertainties inherent to the company’s business.

[Technical Issues] Mr. Raju Vegesna, Chairman of Sify Technologies Limited. Sir?

Raju Vegesna — Chairman & Managing Director

Thank you, Shiwei. Good morning, everyone. Thank you for joining us on the call.

As the pandemic continues, Sify has shifted its focus from business continuity to business transformation. As our clients gain confidence in our ability to ensure their effective IT operation, they’re increasingly turning to our digital services, seeking transformation capabilities to help them to further automate their operations in anticipation of the new normal. Our IT services infrastructure, network services, automation skillsets, and knowledge of evolving IT landscape has ticked the right boxes for the client as they evolve their IT capabilities. The breadth of projects executed has helped Sify to mature its digital services and is establishing us as a digital transformation specialist with a full range of convergence capabilities.

Now let me bring in Kamal Nath, our CEO, to expand on some of these business highlighted for the current — for the past quarter. Kamal?

Kamal Nath — Chief Executive Officer

Thank you, Raju.

During the quarter, we have witnessed the urgency among clients to adopt IT infrastructure models, which would provide them the agility and flexibility to run their businesses remotely during a crisis. Hybrid IT model built on hybrid cloud infrastructure is evolving as the way to go. Our Cloud@core model of products and services are completely aligned to the trend and is finding wide acceptance with customers, who have realized the natural fitment of the model not only for digital optimization but also for digital transformation.

In line with the precedent [Phonetic], I would like to expand on the business highlights and our growth drivers. Revenue from data center-centric IT services grew 12% against the same quarter last year. Segment-wise, revenue from Data Center Services, Cloud and Managed Services, and Technology Integration Services grew 36%, 9% and 22%, respectively, while revenue from Applications Integration Services fell by 37%. Revenue from network-centric services fell by 8% over the same quarter last year. Segment-wise, again, revenue from Data Connectivity Services grew 3%, while revenue from the Voice business fell by 36%.

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 the movement of workloads from on-premise data centers to hyper-scale public cloud and hosted private cloud in varying degrees, based on the digital objectives of the enterprises. This results in the 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, etc., is shifting the balance to the adoption of hyper-scale 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 now 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 Cloudinfinit, AWS and Azure. They also entrusted Sify with management and security services. Customers choosing Sify as their data center hosting partner as they embrace hybrid cloud strategy. Customers choosing Sify as their multi-service digital transformation partner. And customers choosing Sify as their network transformation and management partner as they migrate to a cloud-ready networks.

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?

Raju Vegesna — Chairman & Managing Director

Vijay, you’re on the mute. Vijay, are you on the mute?

Kamal Nath — Chief Executive Officer

Vijay?

MP Vijay Kumar — Chief Financial Officer

Yeah. Thank you, Kamal. Good morning, everyone. Allow me to sum up the financial performance for the second quarter of financial year 2021.

Revenue for the quarter was INR5,899 million, a growth of 2% over the same quarter last year. EBITDA for the quarter was INR1,189 million, an increase of 12% over the same quarter last year. Profit before tax for the quarter was INR414 million, an increase of 48% over the same quarter last year. Profit after tax for the quarter was INR257 million, an increase of 35% over the same quarter last year. Capital expenditure during the quarter was INR797 million.

Our people commitment and business continuity process have ensured that operating performance continued to remain steady throughout this period of pandemic-impacted operating environment. We will be conservative in our operating spend, while we increased our capital expenditure to support the anticipated demand for our data center and network infrastructure. Cash balance at end of the quarter was in INR4,242 million.

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

Raju Vegesna — Chairman & Managing Director

Thank you, Vijay.

As I remarked last quarter, the pandemic has pushed us and our clients to explore digital transformation service as a solution to bring the demand of an automated IT landscape. As [Phonetic] the only converged ICT solution player in the market, we are best placed to deliver this solution at the most appropriated cost and within the contracted time, and now that translates into great value for our clients.

Thank you for joining on this call. I will now hand over to the operator for questions. Operator?

Questions and Answers:

Operator

[Operator Instructions]

And our first question comes from Greg Burns from Sidoti & Company. Go ahead, Greg.

Greg Burns — Sidoti & Company — Analyst

Good morning. So you just mentioned about the pandemic accelerating or pushing the digital transformation of businesses. I think you’d also mentioned during the prepared remarks about how the companies are really focused on continuity rather than transformation, I guess, probably at the onset of pandemic. But have you seen any change in the market or companies starting to move forward with projects? If you could just talk about the band environment and if you’re seeing any improvement there in terms of maybe an acceleration of these digital transformation services? Thank you.

Raju Vegesna — Chairman & Managing Director

Kamal, do you want to take that?

Kamal Nath — Chief Executive Officer

Yeah, sure. Thank you, Raju. So yes, definitely, in the last quarter, we have seen, as the businesses are coming back, the customers are prepared to build agile IT infrastructure, which can help them not only in a normal time, but also during pandemic kind of kinds of situations. So this is one. The second part is the customers are also looking at — in the digital transformation, if you can divide into two parts, digital optimization and the real digital transformation, the customer are also optimizing their digital IT assets, which is a very significant trend, which we are see. The other trend, of course, once they do their digital optimization, they will go for digital transformation. Some customers who are already at a significantly higher part of the curve, they are going for digital transformation, particularly the manufacturing organizations who got badly hit during the pandemic.

The other trend what we are seeing, a significant number of customers used to be in their on-premise data center, which they face huge problem in managing their data center operations, so — which is a good news for us because the customers — those sectors, which were typically on-premise, they’re also now are actively talking to move to — and evaluating rather to move to a hosted and cloud environment.

Greg Burns — Sidoti & Company — Analyst

Okay. So would you — I guess, maybe how would you characterize your pipeline? Do you see a growing pipeline of opportunity for the company?

Kamal Nath — Chief Executive Officer

Absolutely. So the pipeline is significantly increasing in the data center hosting space, the cloud space and very interestingly, in the hybrid cloud space. Because every time a customer intends to move from their data center, it’s an opportunity for them also to not to just shift from one data center to the other data centers, but also have a relook at their entire IT architecture. So partly, the customer — mostly the customers are deciding for partly hosted environment and partly cloud environment. So as we can read all across like the hybrid cloud model is getting adopted, and that is the way to go. So our investments, our pipeline, all are in the right direction and as far as this trend is concerned.

Raju Vegesna — Chairman & Managing Director

So, Greg, to answer your question, one of the things is having data centers and the network on the cloud, as an ICT player, we see one of the great opportunities for Sify uniqueness, having these three together, that provides in this transformation, we are the unique opportunity — we are the unique beneficiary of this integrated plan, ICT. And that is very beneficial going forward.

Greg Burns — Sidoti & Company — Analyst

Yeah. Okay. All right. And I just wanted to also touch on some of the specific business units. So the Technology Integration Services, the growth there was a little bit better than we were expecting. Can you just talk about that business? What was driving that? Is project activity picking up there, and maybe what’s the outlook for the remainder of the year for that part of the business?

Kamal Nath — Chief Executive Officer

Yeah. So this is also related to what I mentioned. The customers — because the Technology Integration Services is about creating custom-build infrastructure for clients. So when the customers are moving from one data center to the other data center or more from an on-premise environment to a hybrid environment, there is always a part of the infrastructure, which will be addressed by our Technology Integration Services business. So as our Chairman was mentioning, so when projects [Phonetic] are undertaken, it increases the funnel as well as business for our data center business, our network business, our cloud business, as well as our Technology Integration Services business. So that is the synergy, which each of these businesses line are able to see because of the hybrid cloud adoption.

Greg Burns — Sidoti & Company — Analyst

Okay. I guess — so this part of the business was underperforming over the last couple of quarters, but it was a pretty solid bounce back this quarter. What’s your outlook for the remainder of the year? Is the pipeline full? Do you have projects…

Kamal Nath — Chief Executive Officer

We have projects — we have projects there.

Raju Vegesna — Chairman & Managing Director

[Speech Overlap] discuss about the future. But as the — coming out of this pandemic, like Kamal outlined, as the projects — as this transformation is happening, this overall integration, technology integration where you integrate other provide [Phonetic] services — products and solutions with our network services, our security services and our Data Center Services, we see a good plan into the digital transformation. The technology integration plays a big role in the digital transformation projects.

Greg Burns — Sidoti & Company — Analyst

Okay. And the Applications Integration Services, the decline there, was that tied to a specific contract maybe wasn’t renewed, or around — was it specifically around testing, or could you just describe what was driving the decline on that side of the business?

Raju Vegesna — Chairman & Managing Director

Yeah. Mainly — okay, go ahead, Kamal.

Kamal Nath — Chief Executive Officer

Yeah. So one of the portfolio in the technology — sorry, in the Applications Integration Services are our online test, which, of course, has because of the pandemic situation and for most of the quarter, partial lockdown, it has impacted. So because that used to be earlier, a significant part of our revenue in that business. But since now, that business has not grown in terms of revenue in the previous quarters, so that impact is predominantly because of this.

Greg Burns — Sidoti & Company — Analyst

Okay. So it wasn’t because of like a lost contract or anything, it’s just because the pandemic’s limiting testing?

Raju Vegesna — Chairman & Managing Director

Yeah. That’s correct.

Kamal Nath — Chief Executive Officer

Right. Right. The online tests, yes.

Greg Burns — Sidoti & Company — Analyst

All right. And maybe could you give us an update on your at your data centers in terms of how many you currently have? What’s the utilization rate? Maybe what are the plans in terms of adding extra capacity?

Raju Vegesna — Chairman & Managing Director

Vijay, do you want to take on that? Vijay?

MP Vijay Kumar — Chief Financial Officer

Yes. Yes, Raju. So as far as the data centers are concerned, we currently have 10 facilities, which are pan-India across six metropolitan cities. And these facilities are all largely contracted and revenue generating. The rest of it are either contracted and about to generate revenue or we have small capacities lift. As far as our expansion is concerned, we are now having plans for adding capacities across four cities, and we will soon do the groundbreaking for two of our facilities. And once we do it, we will keep you communicated in the subsequent earnings release.

Greg Burns — Sidoti & Company — Analyst

Great. Thanks. And what was the debt balance at the end of the quarter?

MP Vijay Kumar — Chief Financial Officer

The debt balance is about $70 million.

Greg Burns — Sidoti & Company — Analyst

Okay. And it looks like the interest expense went down a little bit in the quarter. Was there anything specifically driving that?

MP Vijay Kumar — Chief Financial Officer

Two reasons. One is the interest rates in India have generally softened. And second is, we do have some interest credit, which we have got — what you see is the net finance expense. So we received an interest credit for one of a tax refund. And as far as the interest on tax is concerned, given the uncertainty it’ll be released — it’ll be received, the accounting is as always done on receipt basis.

Greg Burns — Sidoti & Company — Analyst

Okay, thank you very much.

MP Vijay Kumar — Chief Financial Officer

Thank you.

Operator

[Operator Instructions]

And there appear to be no further questions at this time. I would now like to turn it back to management for any closing remarks.

Raju Vegesna — Chairman & Managing Director

Thank you, everyone, for joining on this call. We will look forward to interacting with you throughout the year. Please stay safe and healthy, and have a good day. Thank you.

Operator

[Operator Closing Remarks]