Sify Technologies Limited (NASDAQ:SIFY) Q2 2024 Earnings Call Transcript

Sify Technologies Limited (NASDAQ:SIFY) Q2 2024 Earnings Call Transcript October 20, 2023

Operator: Greetings. Welcome to the Sify Technologies Financial Results for Second Quarter Fiscal Year 2023 through 2024. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Praveen Krishna. You may begin.

Praveen Krishna: Thank you, Holly. Good morning, and 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 my Chairman, Raju Vegesna; my Executive Director and Group CFO, Mr. M. P. Vijay Kumar; and my CEO, Mr. Kamal Nath. 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’ll 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/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 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’d like to point out that certain statements contained in the earnings release and in 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 interested 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 my Chairman, Mr. Raju Vegesna. Chairman?

Raju Vegesna: Thank you, Praveen. Good morning, and thank you for joining us on the call. India’s data policy is entering into the final phase of being adopted into the law. This will give a shape and clarity of our data localization and formalization regulations around the data security, which will help accelerate investments in India’s data center land. This will also lead to India being viewed as a more viable interconnect point between Asia and Middle East by international connectivity players. Enterprise is continuously exploring digital transformation and government entities looking into automate the scale. Social welfare system will be important target audience for Sify’s digital transformation tools [technical difficulty]. Let me now bring Kamal, our CEO, to expand some of the business highlights in the past quarter. Kamal?

Kamal Nath: Yes. Thank you, Raju. As enterprises pursue their digital transformation and digitalization objectives, they are also recalibrating their digital infrastructure across the cloud network security and EDGE infrastructures. Our 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 recalibrate 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 31%, digital services at 28% and network services at 41%.

During the quarter, Sify added 1.2 megawatt of new data center capacity. As on September 30, 2023, Sify has deployed 6531 SDWAN service points across the country. Sify now provide services via 952 fiber nodes across the country, a 14% increase over the same quarter last year. During the quarter, Sify invested USD 1.5 million in startups in the Silicon Valley area as part of our corporate venture capital initiative. To date, the cumulative investment stands at USD 7.07 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. P. Vijay Kumar: Thank you, Kamal. Good morning, everyone. Let me briefly print the financial performance for the second quarter of financial year 2023-2024. Revenue was INR 8,791 million, an increase of 11% over the same quarter last year. EBITDA was INR 1,519 million, a nominal increase of 1% over the same quarter last year. Profit before tax was INR 52 million, a decrease of 76% versus the same quarter last year. Profit after tax was INR 15 million, a decrease of 87% versus the same quarter last year. Capital expenditure during the quarter was INR 1,797 million. We continue to make substantial investment in capacity creation across data centers and network expansion and people to build skill sets for IT services opportunities we foresee given the digital transformation engagements that India Inc.

is actively pursuing. This has led to the accompanying depreciation and interest cost reflecting on our net profit. We are also actively scaling up on our sustainable measures across all businesses, especially our data centers. The cash balance at the end of the quarter was INR 7,570 million. I will now hand over to our Chairman for his closing remarks. Chairman?

Raju Vegesna: Thank you, Vijay. Enterprises in India are aggressively pursuing digital transformation model for their businesses. In their search for partners, they’ll look for service providers who will bring a value proposition to the table. Our converged ecosystem and our digitally enabled services are evolving to be the answer to most of their business needs. So we have a great opportunity across India. And now that’s the way we are looking at Thank you joining us on this call. I will now hand over to operator for questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Your first question for today is coming from Jon Atkin at RBC Capital Markets.

Jonathan Atkin: Thanks very much. I wondered if you could talk a little bit about AI demand in India? And anything that you’re seeing differently than three months ago, six months ago in terms of overall demand into the market? And then what implications it has for maybe your capital deployment going forward and your strategy for taking advantage of that demand? Thank you.

Raju Vegesna: Hi John, this is Raju. So to answer, I’ll make it into two sections. One, if you look at AI/ML adoption in India, it is every discussions we are having with any enterprises or even in the government, there is a talk about AI/ML adoption in their businesses, enterprises. So that is given. Either you look at it how they want to run their network operation, how they want to run their digital services, how they want to run the data centers? So every discussion has AI/ML opportunities are there and that is the way that customers are looking at how do you adapt AI/ML will be useful for their business. Second, the AI/ML, what we are seeing is the – because the growth of the AI/ML, what we see the capacity required for the data centers also, we are seeing the uptick in the market.

So I think it’s good for Sify for both our Digital Services and even network infrastructure point of view, and then also our data center expansion. So overall, in India that AI/ML is an important topic. And every customer is interested how they can adapt AI/ML tools and technology across the board.

Jonathan Atkin: To the extent that you are going to directly try to meet that demand by providing capacity for large language models and so forth, I wondered what implications that might have for your capital budget and even your design given in times the higher density – the higher rack density requirements that one off and associates with these requirements?

Raju Vegesna: All over data centers, especially the new ones are acute to support higher density racks. And also, we also have a lot of the data center capacity is going to be available. So we are in a very good position to take the AI ML uptick either coming from a hyperscaler or even in Indian enterprises market. So we – that is one of the considerations outlook. And we invested across our data center and our network infrastructure.

Jonathan Atkin: Thank you.

Operator: [Operator Instructions] Your next is coming from Greg Burns at Sidoti & Company.

Gregory Burns: Good morning. Could you just update us on your road map for the new data centers, how much capacity you plan to bring online over the next year and the timing of that?

Raju Vegesna: One is – Greg, is we will not forecast a lot of the things. But as we expanded before, we are bringing substantial capacity in Mumbai market, and we are bringing substantial capacity in our North India Noida market. And also, we are bringing in our Chennai market. And we are also expanding – this is – it is going to be available in the next six months in the market, all these capacity. And the remaining things we are investing in our Hyderabad and Bangalore [plans also]. So we are investing in all the five markets in India.

Gregory Burns: Okay. How much capacity is in the next six months, the Mumbai, Noida, Chennai, how much extra capacity does that bring online?

Raju Vegesna: See the capacity, there are two phases, right? One is physical location, other is availability of the non-IT infrastructure. So we have – we will have probably a capacity a lot of 10 to 12 megawatts within the next six months. And – but we are capable of expanding to –we have – our facilities are capable of expanding between these three locations more than 100 megawatts.

Gregory Burns: Okay. Okay. So more than 100 megawatts total, but the 10 to 12 you mentioned is what?

Raju Vegesna: So you build it by demand.

Gregory Burns: Okay. Got it. Okay.

Raju Vegesna: You build it in phases. Campuses are and then you build it what is required by demand, right?

Gregory Burns: Okay. So you have demand or you’ve sold 10 to 12 megawatts of that 100-megawatt capacity. Is that…

Raju Vegesna: Yes, that either it’s sold or being sold. Some of the things we’ve build ahead of schedule and so that’s the way we look at it.

Gregory Burns: Okay. All right. EBITDA was a little bit lower, and I was looking for this quarter, I guess SG&A rose a little bit more than expected. So could you just talk about what’s driving that growth in SG&A? Is that a good level to model off of going forward? And I guess the EBITDA margin was down because of it this quarter. So is that – is this a good level to think about for the business? Or do you expect that to increase as maybe some of the revenue on these new investments?

Raju Vegesna: One is we are doing the new investment. And also, our Digital Services, we are substantially getting that thing under the track. So we are investing in our manpower and other activities. So to make it all three independent businesses especially can grow, growing fast. So we are making some forward costs and investments in these areas. That’s the reason why our SG&A is high. And probably you are seeing this bump substantially reinvested, but I think it will be – over the time, it will be proportional to our revenues.

Gregory Burns: Okay. Okay. And then the debt level, does that include all of the Kotak investment? Or has any part of that been reclassified as equity?

M. P. Vijay Kumar: Till date. And we have to draw additional money anytime April [technical difficulty] and before 2026 October.

Gregory Burns: Okay. And lastly, the Digital Services was up 25% in the quarter. What was the primary driver of that growth?

Raju Vegesna: Like I said, we – once we separated our Digital Services, and we are putting a lot of focus, and we have – the way I’ll describe the Digital Services, if you take our two infrastructure investments, network and Data Center Colo, our network managed services, our cloud, our application, digital managed services, all three, we are seeing a growth. So we are investing continuously on that all the areas. There is no one major deals can say separated. Overall, we see the growth, and we are putting a lot of effort to make that business to grow enough.