Sify Technologies Limited (NASDAQ:SIFY) Q2 2025 Earnings Call Transcript

Sify Technologies Limited (NASDAQ:SIFY) Q2 2025 Earnings Call Transcript October 22, 2024

Operator: Good day, and welcome to the Sify Technologies Financial Results for Second Quarter Fiscal Year 2024/’25. At this time, all participants are in a listen-only mode. After management’s prepared remarks there will be a question-and-answer session. I would now like to turn the call over to your host, Praveen Krishna of Investor Relations. The floor is yours.

Praveen Krishna: Thank you, Kelly. I’d like to extend a warm welcome to all our participants on behalf of Sify Technologies Limited. I’m joined on the call today by Mr. Raju Vegesna, our Chairman; M.P. Vijay Kumar, Executive Director and Group CFO and Kamal Nath, Chief Executive Officer of Sify Technologies. Following on the results, there will be an opportunity for questions. If you do not have a copy of our press release, please call Weber Shandwick at +1(212) 546-8260, and we’ll have one sent to you. Alternatively, you may open 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 reported 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 defer some more from the GAAP announcements made in previous years. A presentation of the most directly comparable financial measures calculated and presented in accordance with the 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 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, the company seeks protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include a variety of factors, including competitive development 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 our 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. Chairman?

Raju Vegesna: Thank you, Praveen. Good morning, and thank you for joining us on the call. The enterprise landscape in India is undergoing a transformative evolution, driven by a confluence of regulatory advancements, innovative business models, and robust infrastructure development. As we navigate this dynamic environment, it is clear that India is emerging as a global hub for information and communication technology, ICT. Regulatory frameworks are becoming increasingly conductive to business growth allowing for an ecosystem that encourages innovation and investment. Initiatives such as the Digital India, the Make in India campaign are streamlined processes, incentivizing entrepreneurships. This shift is not just about adopting new tools. It is about reemerging how we connect business and deliver value to our stakeholders. Let me now bring in our CEO, Kamal Nath, to explain the business highlights. Kamal?

Kamal Nath: Yeah, thank you, Raju. As enterprises embark on their digital transformation journeys, they are reshaping their IT frameworks to integrate a diverse array of innovative solutions. The overarching goal remains the same, which is to enhance user satisfaction, ensure operational resilience and safeguard digital assets. To support these ambitions, we are making significant capital investments and expanding our range of offerings. Our strategic focus on delivering innovative outcomes through a comprehensive suite of infrastructure and digital services uniquely positions us to partner with businesses during this pivotal transformation. Let me now expand on the business highlights for the quarter. The revenue speed between the businesses for the quarter was data center colocation services at 32%, digital services at 32% and network services at 36%.

During the quarter, Sify commissioned 6.5 megawatts of data center capacity in Mumbai. As of September 30, 2024, Sify provides services via 1,069 nodes across the country, a 12% increase over the same quarter last year. Sify has now deployed 10,057 SDWAN service points across the country. A detail 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 average for the quarter. Vijay?

M.P. Vijay Kumar: Thank you, Kamal. Good morning, everyone. We draw our attention to Sify adopting the new standard of International Accounting Standards Board, recent issuance of IFRS 18 on presentation and disclosed in financial statements starting with the last quarter ending June 30, 2024. By adopting the new framework, we seek to maintain clarity and consistency in our financial communication. Importantly, while our presentation may change, there is no change in the total income or net profit. Let me briefly sum up the financial performance for quarter two of financial year 2024/’25. Revenue was INR 10,275 million, an increase of 17% over the same quarter last year. EBITDA was INR 1,963 million, an increase of 29% over the same quarter last year.

Profit before tax was INR 87 million and profit after tax was INR 49 million. Capital expenditure during the quarter was INR 2594 million. The cash balance at the end of the quarter was INR 7,574 million. We remain committed to cost-effectiveness and fiscal prudence in our operating decision-making. Our ongoing events reflect a forward-thinking perspective that anticipates market trends. We expect these efforts will positively impact our net profit in the near future. However, it is essential to acknowledge that these investments also lead to increased depreciation and interest costs in the financial statements. We are actively scaling our sustainable practices across all our businesses with particular emphasis on our data centers. This commitment to sustainability is not just a compliance measure.

It is integral to our long-term strategy and resonates with the broader digital transformation initiative being pursued by industries. I’ll now hand over to our Chairman for his closing remarks. Chairman?

Raju Vegesna: Thank you, Vijay Kumar. The network, data center and digital businesses are now attracting the best of the breed of clients, partnerships and capital. That is the beginning of our next phase of growth. Thank you for joining on this call. I will now hand over to the operator for questions. Operator?

Q&A Session

Operator: [Operator Instructions] Your first question is coming from Greg Burns with Sidoti & Company. Please pose your question. Your line is live.

Greg Burns: Good morning. Just a question about the demand environment. Where are you seeing the most demand growth coming from? Is it from hyperscalers or is it from enterprise customers? And then can you just talk about maybe how AI, the growth of AI is maybe reshaping the demand environment? Thank you.

Raju Vegesna: So Greg, this is Raju. So as we grow always between hyperscale and enterprise, one of the thing is Sify is in unit, we are not just depending upon hyperscalers, we have a good footprint of enterprise customers in our data centers. That’s the way we look at it in the same ratio of hyperscalers and the enterprises, we are continuously growing. To answer your second question, AI. So AI is just starting in India. So enterprises started looking AI, and we have a big submit going this week NVIDIA AI Submit. So we are part of the sponsors and we are getting ready our AI plans. As you already know, we are the first certified by NVIDIA for the air cooling and liquid cooling up to 130 kilowatts per rack. So we are very much excited and what is NVIDIA is doing and we see a lot more potential, not only for Indian consumption for a global consumption supplied by India with having a talent of IT resources to operate AI requirements.

So we see a great potential possible for India and we are ready, and we are the first one ready with such kind of data centers ready data centers across three cities: Mumbai, Chennai, and Noida. Noida means Delhi.

Greg Burns: Okay. Perfect. You mentioned, I guess, commissioning 6.5 megawatts of data center capacity in this past quarter. Can you just update us on maybe the number of data centers you operate, how much megawatt of capacity that you currently have operational and maybe what the road map is for the rest of the year, how much capacity do you expect to bring online for the remainder of this fiscal year?

Vijay Kumar: So Vijay Kumar here. We currently have data center capacity, which is live and operational for about 120 megawatts, of which 105-megawatt is already being consumed by the customers and rest of it are in different stages of contracting and beyond that, there are greenfield projects, which we commenced last year, which are nearing completion and should go live in the next few months, where these facilities have a design capacity at present of about 52-megawatt aggregate, but scalable much higher of which initially we will enable about 6 megawatts to go life.

Greg Burns: All right. Perfect. Thank you. The — in the quarter, digital services was a lot stronger than we were modeling. Was there anything in particular driving that? Was it from project-based technology integration services work or more recurring cloud and managed services type growth?

Vijay Kumar: This turnaround in quarter two is attributed to some project-based revenues in our network managed services business and that has contributed to the positive change in this quarter.

Greg Burns: Perfect. Okay. And then in terms of the new nonconvertible debt that you took on. It seemed like the rate was pretty favorable. How did that rate compare to your existing debt and are you planning to use that new debt to pay off some of your old debt or is it just going to be put towards maybe investments into the business?

Vijay Kumar: Yes. So this debt was raised in our data center colocation subsidiary, and it is listed on the Bombay Stock Exchange here. This is a 15-year debt with a 5-year moratorium and repayment starting up from the sixth year onwards, one-tenth over the remaining 10 years thereafter. In terms of the cost of this debt, it is about 40 basis points lower than the debt which it is replacing now and these entire proceeds have been used for replacing the existing debt. Having said that, the existing debt was due for repayment over the next 18 months, whereas this debt, which is replacing the old debt has a longer tenor. So it, in fact, released — for funding the growth of the data center capacities.

Greg Burns: Okay. Perfect. And the debt balance and the cash balance that you mentioned, does that include — I guess, I’m sorry, you’re just replacing, but that includes this…

Vijay Kumar: Exactly. You’re right. You got it right. Got it right.

Greg Burns: Okay. And then in terms of spending, your SG&A maybe as if we look at it as a percent of revenue, do you expect that given the investment roadmap that you have laid out? Do you expect that to increase as a percent of revenue or kind of maintain at the current levels?

Vijay Kumar: It should maintain at the current level. We have actually invested quite a bit on SG&A over the last three years and with the assets getting monetized, we should be able to maintain at current level for foreseeable future.

Greg Burns: Okay. Okay. Perfect. That’s all for me.

Vijay Kumar: Thanks, Greg.

Operator: Your next question is coming from Jonathan Atkin with RBC Capital Markets. Please pose your question. Your line is live.

Jonathan Atkin: Thank you. I was interested in what you’re seeing among Indian domestic enterprise commitments. This is now for your data center business or are we talking about multi-year contract terms. Can you give us a flavor for that? And how that might compare with the length of the commitments that you’re signing with some of your international customers?

Vijay Kumar: So as far as the data center customers are concerned, as Mr. Vegesna mentioned in response to the previous queries, we have customers who are hyperscalers and the enterprise segment. The hyperscale contracts are an average length of about 9 years, which are renewable further. And the enterprise customers’ contracts are on an average about 5 years, and with potential for new renewal thereafter. Our past historical experience is we have had almost 0 churn in our customer base.

Jonathan Atkin: And then I’m interested in the customer preferences, particularly on the international side for your larger deals, are the customers expressing the preference for you to build the full turnkey data center or to what extent are they preferring or willing to perhaps take towered shelves, where they would then kind of complete the fit-out work after you deliver the shell.

Raju Vegesna: Jonathan, this is Raju. So it is both ways. There are build-to-suit opportunities. There is a shell kind of model and also the colo-model, right? So they’re mixing based on the demand, these kind of things. So as a build-to-suit, it takes longer time. And when the opportunities come, they don’t have a requirement, they can do it. I think they will — they’re adopting colo- model.

Jonathan Atkin: I’ve got a couple more if you’ll bear with me. So I’m interested in just kind of — you mentioned AI. Any inkling that you have as to what that means in terms of the customer use case? Are we talking about machine learning? Are we talking about large foundation models? Is it AI infants at this point? What — how do you see this today? And then maybe going forward as best as you can tell over the next couple of years, how is the topology evolving within India?

Raju Vegesna: So the way I look at is something is AI still evolving in India. So India enterprises point of view, they’re building the bottles are correcting the data to use the AI in India. But what I see is some of the hyperscalers already having AI capability, people are adapting. And also other opportunities, as you know, to deploy AI, you need to have certain kind of data centers and other training IT resources to run those models. So being India, equipped with having a data center, having a power, having skill sets of the people, I believe India is in a unique position to take advantage in this AI evolution. That is the way I’m betting, right? It’s just starting in India.

Jonathan Atkin: Last question or two. A lot of foreign capital, joint venture capital coming into India with very, very significant build ambitions. And I’m interested in the implications it has on you from a competitive standpoint or not? Maybe these are mutually validating types of capital allocation where it’s kind of like a rising tide with all boats? Or do you view that as competitive? And then any implications from this data center development on your network services business?

Raju Vegesna: No, I think that is always will be there. One is being India being an attract to for a lot of people to deploy their capital. That means they’re trying to back India. So being an established player being a domestic player, Indian or data centers, we have our mind share and our market share. So that is the way we look at it and we are one of the few capable of delivering end-to-end data center services, building from ground to a cap of customizing the data centers and a different variance of the data centers and how do you equip for the new AI readiness trying to do 130 kilowatts per rack. We are in a — we are not — there are a lot of real estate players entering into the market. We are not a real estate kind of player. We are a technology data center player and building over the 20 years and going through, we are building generation 3 data centers, that is an advantage for us Jonathan.

Jonathan Atkin: Lastly, just the Indian fiber markets, particularly things like dark fiber. Can you maybe describe the landscape? You obviously have a lot a big part of your business, but other kind of investments and deployments that you see going on for the industry overall around dark fiber?

Raju Vegesna: Yes. So as you see, now having the cloud on the data center, the old server client model is evolving, networking creates a big role. So as you can see, our networking business is also growing with their data centers and we are in a unique position to do both network and the data center opportunities. So it’s not — it may not be our data centers, still we provide a connectivity to the data centers. So it goes — I believe, both network and the data center has to be — is growing and some of the existing networks are outdated and not capable of servicing the kind of bandwidth is required, especially for AI applications. It’s a great opportunity for us to building new networks with the new technologies.

Jonathan Atkin: Thank you very much.

Raju Vegesna: Thank you.

Operator: [Operator Instructions] Your next question is coming from (indiscernible) with HiFi Advisory Services.

Sri Gopal Bajaj: This is Sri Gopal Bajaj here from Stock HiFi Advisory. Am I audible?

Raju Vegesna: Yes, yes. Please go ahead.

Sri Gopal Bajaj: Yes. What is your current data center, which is already on colocation and what is the future plan, which is coming on stream?

Raju Vegesna: So, we cannot talk about much over the future. We have data centers in six markets in India. We have in Mumbai, Chennai, Bangalore, Hyderabad, Kolkata and Noida that is Delhi. So we are an established player. We are one of the top players of the data center and we are hosting some of the hyperscalers, we are hosting some of the enterprises. So we are an established player, more than 20 years in the data center business.

Sri Gopal Bajaj: What is the current size, at least you can…

Raju Vegesna: Current size…

Vijay Kumar: Current size, we have 120 — I’m Vijay Kumar here. We have 120-megawatt of capacity, which is built, of which about 105-megawatt is already under consumption by the customers, and the remaining is at different stages of contracting.

Sri Gopal Bajaj: Going forward, you still intend to continue with your debt position in the same manner or you’re having any plans to cut down on the debt?

Vijay Kumar: No debt will be integral part of our data center capacity expansion. Typically, our model is to take two-thirds of our project cost as debt. The rest of it is funded by equity, including internal accruals.

Sri Gopal Bajaj: You cannot disclose the future plans. Is that clear?

Vijay Kumar: Yes, yes. We are bound by the forward-looking statements restrictions, which are there.

Operator: Okay. Your next question is coming from Shrikant Pigaga. Please pose your question. Your line is live.

Unidenfied Analyst: Good evening, everybody. Mr. Raju, Mr. Kamal Nath, and Mr. Vijay Kumar, congratulations on a good set of numbers and also returning back to profits. I have some very specific questions, please excuse me, if there is anything which is — which sounds out of normal due to lack of my knowledge about part of your business. If I understand correctly, the network services had — royalty or some kind of an income this quarter. Is that evident to put the company this quarter back into — are there any one-offs?

Vijay Kumar: Sorry, your voice was not coming clearly. You said net worth something…

Unidenfied Analyst: Can you hear me now?

Vijay Kumar: Yes, better. You said something around network business.

Unidenfied Analyst: Yes, there was some additional income or license you are referring to in this quarter or some kind of a fee or an income, how much of that has contributed to the profit this quarter. So the question is, are there any one-offs in this quarter?

Vijay Kumar: No, there are no — in our network business, there are no one-off items. Network and data center business, largely our annuity kind of revenue. On the IT services business, there are always some projects, which get executed in quarters.

Unidenfied Analyst: Okay. Okay. So if — even if there is an additional one client in the next quarter, it could be some other client which could be contributing. Is that correct?

Vijay Kumar: Correct. And the size could vary — size of the project could vary.

Unidenfied Analyst: Right, right. I mean I have a few questions. I’ll go to my second question, if it is okay.

Vijay Kumar: Please.

Raju Vegesna: Please.

Unidenfied Analyst: So the gross margins are always going to be the study in that 30%, 35%, 36%, 34% kind of range, given that this is more of an IT, IT services kind of a company, I would have thought the gross margins would be closer to 50%. Is my understanding wrong?

Vijay Kumar: Yes. We broadly have 3 businesses which have quite distinct characteristics and all the 3 businesses are in terms of revenue, 1/3 each approximately. As far as the network services are concerned, it’s a reasonably asset-light model with substantial amount of expenses being capacity, which is leased out from third-party telecom operators. And on data center business, we have power as a significant cost, which is largely a pass-through from which we get from customers, which we pay to the state electricity boards. And on the IT projects and IT services business, we have a combination of projects and services, and that’s a business where over the last 2 years, we have been incurring substantial amount of expenses for capacity building. Both in terms of people, upskilling them and on tools. So the margins historically, as you mentioned, are at the range of 34%, 35%, but you need to dissect those and understand them separately.

Unidenfied Analyst: But even at the consolidated level, overall, considering this is not like a manufacturing-intensive kind of business, do you — is it even possible at some stage, the gross margins will be north of 50%? Is that even a possibility for a company — for a business like this?

Vijay Kumar: I wouldn’t be able to comment on that. At least in the foreseeable future, it’s unlikely to be that number.

Unidenfied Analyst: Okay. So I’ll move on to my next question. Given that the interest as an expense and depreciation for a company, which is building a lot of capacities will always be proportionately growing along with the revenue. Can we consider that the numbers currently we are seeing this quarter, both for the depreciation and the interest expense kind of at the peak — are these the peak levels or we have…

Vijay Kumar: No, the depreciation will increase quite substantially. There are a couple of greenfield projects, which are expected to go live in the coming months. And once those facilities go live, the depreciation number will increase. And since the interest capitalization on the projects under construction will also see, there will be an impact on the interest as well.

Unidenfied Analyst: And all the loans are INR-denominated or do you have any foreign loans?

Vijay Kumar: No, all the loans are INR-denominated.

Unidenfied Analyst: Okay. And I see that the cash balance is probably from maybe INR 50 million to INR 90 million, is that right? I’m — but from INR 50 million now, we have close to about INR 90 million cash balance. And what has helped that?

Vijay Kumar: You’re right. Two reasons. One is we recently did a rights issue, and those proceeds are to be fully deployed in expansion. And second, is some marginal improvement in the operating efficiency.

Unidenfied Analyst: And in terms of any specific numbers, I know there is some moratorium of initial 5 years for maybe the loan, which was recently converted into bonds. There is a 5-year moratorium. Does it mean that the interest doesn’t have to be expensed into the P&L for 5 years?

Vijay Kumar: No. The interest will come into P&L and the interest will also be a cash flow. Only the moratorium is only for the principal.

Unidenfied Analyst: Okay. Thank you for the clarification. So now — no, sorry, one last question. Now that these three are the SG&A depreciation and interest expense, that actually take away the substantial amount of contribution or margin generated by the business as such. At what stage — considering that you have ambitious plans to build more data centers, I see that almost INR 5,000 crores, INR 6,000 crores to be deployed over the next several years to build additional capacities. The path to free cash flows is several quarters away or several years away, that would — that is something investors would always be interested to see, right, in the generation of any free cash flows.

Vijay Kumar: Yes. So if you’re looking at free cash flow after considering new capital expenditure, then it is certainly a few years away because the data center industry is poised for a fairly higher CAGR and a substantial amount of capacity will be added by us and our peers in the industry as well. So I don’t think any of us will stop — slow down expansion of our data center capacity. But if you’re looking at free cash flow only after replacement CapEx, of course, even now, we are pretty well positioned, and we’ll continue to have positive cash flows.

Unidenfied Analyst: And all the future expansion, the numbers I see close to $600 million, $700 million to be deployed over the next few years, will be a combination of, again, debt as well as internal accruals?

Vijay Kumar: Yes. You’re right.

Unidenfied Analyst: Okay. Thank you, Mr. Vijay Kumar. I’m done with my questions. But once again, congratulations to the team turning back into profits and we hope next quarter you will do better than this quarter.

Vijay Kumar: Thank you.

Operator: We do have a follow-up question from (indiscernible) with HiFi Advisory Services.

Sri Gopal Bajaj: Mr. Vijay Kumar, can I just know what is your realization per megawatt?

Vijay Kumar: See, these are customer specific numbers, Gopal. And…

Sri Gopal Bajaj: No, average realization.

Vijay Kumar: I don’t think we — I don’t think it will be appropriate. But it’s available in our published financials, the gross revenue. And I told you about the capacity. You could do a reverse working on that. Because the reason — I’d just like to…

Sri Gopal Bajaj: I did the backward calculation. I was getting around INR 1 crores per month — INR 1,04,00,000 per month in Indian terms…

Vijay Kumar: Okay.

Sri Gopal Bajaj: So what I was — the other two businesses are giving you very thin margins. Are you doing anything for that part of it, one is the networking, the other part is, which is like hardly on gross profit of a few percentage below mid-teens also.

Vijay Kumar: Correct. So there’s a lot of work we are putting across for our IT services business. That’s — we see a huge opportunity for that as India embraces more of digitalization. But when new services business in India, it comes at a low margin and scope creeps, which are there. So we are getting our processes better but fundamentally, we have belief in India enterprises consuming more IT services from service providers like us in — and we’d like to stay invested in that business.

Sri Gopal Bajaj: Thank you, sir. Once again, congratulations.

Vijay Kumar: Thank you.

Raju Vegesna: Thank you.

Operator: There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Praveen Krishna for any closing remarks.

Raju Vegesna: Yes. This is Raju again. Thank you for your time on this call. We look forward to interacting with you through the year. Have a good day. Thank you.

Operator: Thank you, everyone. This does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.