Following is an excerpt from the note Sameet Sinha, Senior Equity Research Analyst, at Kaufman Bros. (KBRO), sent to clients:

FISCAL 1Q08 RESULTS IN LINE BUT CAPEX TO INCREASE IN 2008

• Results generally in line. Sify reported fiscal 1Q08 revenue of $34.6 million in line with our estimate of $34.5 million. Gross margins came in at 46.5%, slightly below our estimate of 47%; adjusted EBITDA was $2.9 million (8.5% margin) versus our expectation of $3.0 million. Adjusted EBITDA was in line as higher-than-expected SG&A was offset by a lower-than-anticipated incremental bad debt expense. Our estimate of $2.9 million in adjusted EBITDA nets out $780,000 in incremental bad debt expense (out of a total of $1.28 million) and forex losses of approximately $480,000. Management indicated that the provision for doubtful debts will likely abate and normalize after fiscal 2Q08.
• Corporate services drives growth. The Corporate services business exhibited strong growth, up 33% Y/Y and 12.3% Q/Q to $21.9 million (versus our estimate of $20.3 million). Management has seen efficiencies from the realignment of the sales force to sell multiple products and expects the benefits to gain momentum over the next few quarters.
• Access Media declined Q/Q. The Access Media business was flat Y/Y and declined 4% Q/Q to $10.18 million (versus our estimate of $10.95 million). SIFY announced a new model for its cyber cafes offering enhanced services, and being built in 250-, 300-, and 500-square-foot sizes. The new layout will offer ATMs, a coffee and snack counter, flat screen televisions, and displays for advertising. The capital expenditure for the new cafes will be incurred by the franchisee and will take place both for new and existing cafes. The ISP business declined sequentially, losing 7,000 subs to end the quarter with 208,000 subscribers as consumers disconnected going into summer vacation months.
• Interactive services suffered. This business was down 24% Y/Y and declined 37.5% Q/Q to $1.09 million (versus our estimate of $1.9 million). The slowdown was caused by the failure in its previous strategy to outsource ad sales to Big Bang Media. Management has pulled back and is rebuilding its internal sales team.
• Capex for the quarter was $6.7 million; spending to continue. The $6.7 million in investments was primarily used to cover network expansion, new office space, equipment, and the expansion of the data center in Mumbai. Management indicated that full year fiscal 2008 capex will be close to $36 million, compared to just over $14 million in fiscal 2007. According to management, it is seeing significant increases in demand from Enterprises and wants to build to capitalize on this demand. Additionally, SIFY plans to ramp its spending in sales and marketing with the hiring of 300 to 400 employees domestically and internationally.
• Changes to our estimates. We are lowering our 2008 revenues estimate to $145.5 million from $148.4 million. Our Adjusted EBITDA estimate declines to $12.4 million from $18.7 million.
• Our price target comes down to $7 from $8. This utilizes a 10-year forecast of the company’s estimated unlevered free cash flow discounted at the cost of equity of 13.4%.
• Bottom line. Looking at Chairman and CEO Raju Vegesna’s past experience, it makes sense SIFY is going after the Enterprise market with additional capex layout and hiring of sales people. While the company has the cash balance to support an expanded capex program, it increases the risk profile. The legacy bad debt has been flushed out, which is good news, and we can hope for continued growth in demand and management execution. Until we see traction, we will stay on the sidelines.

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* I personally don’t have a position in SIFY

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On the other hand Rediff’s (Nasdaq: REDF) latest news seems to be more material.  But once again has the price run up a little too much?  Rediff could have some legal issues down the road with the copyrighted content uploaded to Rediff iShare. 

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Following is an excerpt from the note Sameet Sinha, Senior Equity Research Analyst, at Kaufman Bros. (KBRO), sent to clients:

ANNOUNCES ALLIANCE WITH MICROSOFT FOR EDUCATION AND ISP SERVICES

• Sify’s cyber cafes to offer Microsoft education programs. Sify’s iWay cyber cafes is expected to promote and host certification programs for Microsoft products, starting with MS Office. The coursework will be offered online and hence has little incremental associated costs. We believe that Sify will primarily benefit from the browsing fees associated with online education and the company was not able to confirm if there is a revenue share arrangement for the course fee as well.
• Sify’s ISP services to be bundled with Microsoft’s IQ PC. Earlier this year, Microsoft launched its ambitious Unlimited Potential campaign to increase penetration of computer awareness and ownership in less developed countries. As part of this initiative it also introduced a $500 PC (called IQ PC), which ships with a suite of Microsoft’s productivity tools and some education programs as well. The marketing is being tested this month in some cities and will  be extended to the entire country by year-end. Sify’s ISP services will be bundled with this PC, offering consumers 100 free hours of online access, with the option of signing up to a paid service at the end. We are not sure if this bundling will be in the form of a set-up disc in the box or an icon on the desktop, or if this is an exclusive relationship. While this deal has much higher revenue generating potential than the education business, it is totally dependent on Microsoft’s initiatives, which are untested at this point. For example, we believe the $500 price point for PCs is still expensive for the average household in India and will not lead to a sudden increase in PC penetration in the country.
• This is part of a larger game plan for Microsoft. SIFY is now a part of Microsoft’s larger game plan of bridging the digital divide in countries like India. The growth of IT penetration in India is slow and a number of initiatives are in place to speed this up. We feel investors need to understand that this will be a slow path and not to expect dramatic changes in Sify’s fortunes, due to this announcement.
• SIFY has had its own issues. We like Sify as a play on the enterprise services, outsourcing and Internet penetration trends in India. However, the company has had its own set of problems over the last year. The new management team under Chairman and CEO Raju Vegesna is working to clean up the operation and financial structure at the firm, which we anticipate will affect top-line growth for at least another quarter. Once the systems are in place, we believe that management will be aggressive in marketing its various businesses and we could start seeing the benefits toward the end of the year.

• Our price target remains $8. This utilizes a 10-year forecast of the company’s estimated unlevered free cash flow discounted at the cost of equity of 13.4%, down from 13.6%, due to a lower risk-free rate (10-year note) in our CAPM model.

• Bottom line. We would caution investors against increasing expectations for SIFY, due to this partnership. We like the SIFY story long term, due to its exposure to the enterprise services and Internet market in India, but near-term issues at the company keep us on the sidelines for now.

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* No position in SIFY, REDF or MSFT for me.

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TRANSITION CONTINUES; MAINTAIN HOLD

• Higher SG&A affects EBITDA. Sify reported fiscal 4Q07 revenue of $33 million versus our estimate of $32.2 million. Gross margins came in at 46.7%, above our estimate of 46.5%; adjusted EBITDA was $2.4 million (7% margin) versus our expectation of $4 million. The $2.4 million in EBITDA nets out about $1.8 million in incremental bad debt expense (out of a total of $2.39 million) and forex losses of about $400,000. Net of these extraordinary expenses, the variance versus our estimate was primarily due to an increase in SG&A caused by additional hiring and incremental marketing.
• Corporate services drives growth. The Corporate services business exhibited strong growth, up 20% Y/Y and 4% Q/Q to $19.5 million (versus our estimate of $19.3 million). Management has seen efficiencies from the realignment of the sales force to sell multiple products and expects the benefits to gain momentum over the next few quarters.
• Access Media declined. The Access Media business declined 5% Y/Y and was flat Q/Q to $10.6 million (versus our estimate of $10.2 million). Most of the decline is at the cyber cafe business as the management team is focused on turning around the underperforming cafes and has slowed down the pace of new cafe openings. These cafes are being positioned as e-stores providing travel bookings, bill payments and money transfer services. The roll out of these services should be completed in the next 2-3 quarters. The ISP business continues to grow adding 7,000 new subs to end the quarter with 215,000 subscribers. Management indicated that they are already seeing a benefit to gross margins and EBITDA margins due to the restructuring.
• Growth at interactive services declined. This business grew 23% Y/Y and declined 11% Q/Q to $1.6 million (versus our estimate of $1.8 million). The slowdown was caused by the departure of some ad sales personnel and tough comps created by a large corporate order in FY3Q07. The company has announced that it will be outsourcing its ad sales to Big Bang Media, which should give it access to agencies who handle most of the marketing dollars.
• Changes to our estimates. We are increasing our 2008 revenues from $145 million to $148.4 million, primarily at the Corporate business, offset by reductions at the Access Media business. Our Adjusted EBITDA estimate declines from $20.5 million to $18.7 million to account for higher SG&A costs.

• Our price target remains $8. This utilizes a 10-year forecast of the company’s estimated unlevered free cash flow discounted at the cost of equity of 13.4%, down from 13.6% due to a lower risk free rate (10-year note) in our CAPM model.

• Bottom line. As expected, the bad debt write offs continue at SIFY and smaller amounts should be expected for the next 2 quarters. While the turnaround seems to show some traction, it is still in its early stages. Maintain HOLD.

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* No position.  I am out of SIFY.

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Following is an excerpt from the note Sameet Sinha, Senior Equity Research Analyst, at Kaufman Bros. (KBRO), sent to clients:

PREVIEW OF FY4Q07 EARNINGS

• SIFY is expected to announce fiscal 4Q07 earnings before the market opens tomorrow, followed by a conference call at 8:30 a.m.
• Estimates. Our estimates call for revenues of $32.2 million (up 11% Y/Y and 2.2% Q/Q), gross margins of 46.5%, adjusted EBITDA of $4.0 million (12.3% margin) and GAAP earnings per ADS (EPADS) of $0.03.
• Enterprise Services. We expect the Enterprise Services business to grow 4.8% Q/Q and 23% Y/Y to $19.3 million. During the quarter SIFY hired P. J. Nath as the Executive President of its Enterprise business. P. J. Nath used to be the Head of Sales at SIFY a few years back and left to join VSNL, a leading telecom and IT services firm as the Senior Vice President of its Enterprise business.
• Access Media. We expect Access Media to decline 24% Q/Q and 62% Y/Y to $10.2 million. We believe that this business is undergoing significant restructuring as cyber cafe operations are being rationalized and underperforming cafés are being closed or turned around. We expect the company to add 50 new cafés during the quarter and end the quarter with 218,000 broadband subs.
• Portals. We expect this business to grow 7% Q/Q and 62% Y/Y to $1.8 million. During the quarter, SIFY announced that it has appointed Big Bang Media as its Exclusive Internet Ad Sales company. Big Bang Media will manage the complete advertising sales of all of Sify.com’s internet properties. We believe that SIFY could benefit from generating more advertising through advertising agencies, rather than through a direct sales force.
• Expect another quarter of bad debt writeoffs. SIFy has been writing off receivables that have been on the books for some time now which relate primarily to the Enterprise and Access Media business. We believe that the new management team is in the process of cleaning up operations and financials to strengthen the company and we can expect another quarter or two of bad debt writeoffs.

• Our price target is $8. This utilizes a 10-year forecast of the company’s estimated unlevered free cash flow discounted at the cost of equity of 13.6%.

• Bottom line. We believe bad debt writeoffs at SIFY, along with slowing Y/Y growth has caused concern among investors. We believe that the new management team is in the process of restructuring the company both operationally and financially. New senior management executives are being put in place, new controls and systems are being instituted, the operational structure is being streamlined, employees are being retrained in preparation for growing the company. However, the bad debt writeoffs will persist at least another couple of quarters, which keeps us on the sidelines. We will wait for the bad debt overhang to disappear and the growth to come.

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* I am long SIFY

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Let’s look at the third quarter numbers: (ended December 31st)

• Sify posted revenues of $31.5 million – 15.8% YoY and 1.0% QoQ.
• Net profit of $0.94 million compared to a net loss of $0.24 million.
• Revenue declined considerably in the Retail Internet Services division both QoQ and YoY. 
• No triple digit growth in the Portals division.

As you would expect the stock went down almost 14% today. 

Some more things that worry me:

• The management team used the excuse that they were focused with the restructuring during the quarter. 
• I am not sure if Raju Vegesna had a vision for Sify when he bought the majority stake in the company.  I haven’t seen any major signs as of yet.  I will give him the benefit of the doubt for now that some new initiatives might be in the pipeline. 
• There was no mention of the National Long Distance (NLD) and International Long Distance (ILD) licenses Sify’s subsidiary recently received. 
• After the launch of Bangalorelive.in and Mumbailive.in we still haven’t seen a new city specific site launched.  Mumbailive.in was launched back in June 2006 and Bangalorelive.in was launched even before that.  How come no new city specific site has been launched since then?  Is the local portal idea not working?  I thought this would be a good idea but they obviously haven’t worked if you look at the portal revenues.  Sify has several sites and all of them combined bring in less revenue than Rediff.com.   How about showing the revenues from each site? 
• What was the growth in broadband subscribers?  Any plans for Wimax? 
• Conference call showed how little interest there is in Sify.  The only question asked was from the lone Analyst covering Sify.
• How about some user generated content for its web portals.  Sify obviously needs someone from Rediff to show them how to make money from there portals. 

I think Sify is dead money for now unless they announce something huge or there is a buyout.  Management claimed it will take until the end of this year to turn this thing around.  Internet in India still hasn’t boomed so there is still time for this company to turn around. 

As for me I sold one-third of my holdings after last quarters dissapointing earnings came out and didn’t add anything this quarter.  My average is in the 6s so at this point I am going to wait it out.  After all of this, I think this could still be a good long term opportunity if management can turn this around.  I am willing to give Raju and his team until the end of this year to turn this thing around.  By the way, Asif Suria of Sinletter.com made a good call earlier this month to sell Sify from his model portfolio with a gain of 18.81%

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Meanwhile, Sameet Sinha, Senior Equity Research Analyst, at Kaufman Bros. (KBRO) downgraded the stock to a ‘Hold’ from a ‘Buy’.  The price target is lowered to $8 from $13. 

Following is an excerpt from the note he sent to clients:

• Complete overhaul under progress. In Enterprise services, management is working on a complete operational overhaul of sales and support teams to improve efficiency and customer interface. For Access Media, management is looking to increase the revenue growth and profitability of the cyber cafes. All this is happening with a team that is relatively new and looking to install the right systems. We believe that until a permanent CFO is put into place, it will be difficult to coalesce this strategy.
• Bad debt expense clouds the picture. As part of the clean up process, bad debt, which had been maintained on the books, is now being expensed. The team is taking a conservative view on this item, while negotiations are on with the customers about the concerned payments. We believe that this cleanup will also continue for some time.
• We have tweaked our estimates. Our new fiscal 2007 revenue estimate is $122.5 million, up from $122.1 million and adjusted EBITDA is $16.2 million, down from our previous estimate of $17.6 million. Our fiscal 2008 revenue estimate is $144.7 million, down from $144.9 million and adjusted EBITDA is $20.5 million, down from $28.8 million.

• We have reduced our price target to $8 from $13. This utilizes a 10-year forecast of the company’s estimated unlevered free cash flow discounted at the cost of equity of 13.6%.

• Risks for Sify are: competition, presence in nascent markets and uncertainty due to recent management changes.

• Bottom line. We believe the long term opportunity for SIFY is intact but in the near term we have reduced visibility of operations and financials. Raju Vegesna and his new management team is changing the profile of the company (to create a streamlined and synergistic business), which is not a easy process and is affecting revenues and expenses. The changes needed are much more deep rooted than we had anticipated and the lack of a CFO further increases the uncertainty. We do not foresee any catalysts until the overhaul is complete and are downgrading the stock to a HOLD.

* I am long Sify

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Alright this is a strange story and worth sharing. (via DNAIndia)

Apparently, six Yahoo! India (Nasdaq: YHOO) employees used forged ID cards to get into Lakme India Fashion Week and took unauthorized photographs. Sify’s (Nasdaq: SIFY) broadband portal, SifyMax, was one of the official sponsors of the event and even has some exclusive content on their site.

Sify officially filed a police report against Yahoo! India and some of its top executives. Madras High Court granted interim transit bail to two top Yahoo executives, but instructed them to deposit their passports with the court. So who are these top executives?

• George Zacharias – Sify’s former COO
• Ajay Nambiar – Headed consumer channels for Sify before moving on to Yahoo.

It seems like Yahoo’s executives in India are not doing much better then their counterparts in the United States.

* I am long SIFY

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Sify Ltd. (Nasdaq: SIFY) announced today that its subsidiary, SifyComm, received licenses from Department of Telecommunications to offer National Long Distance (NLD) and International Long Distance (ILD).  The licenses will enable SifyComm to offer Domestic Leased Circuits (DLCs) and International Private Leased Circuits (IPLCs) in addition to Long Distance Subscriber Telephony services.  Sify is a leader in VPN services in India and this will enable it to broaden its offerings.

On the one hand it would seem that the market reacted positively to this news as well as the recent CFO departure and thus caused the run-up in the stock price the last few days.  But I am not so sure.  You see the run up in the recent stock price has coincided with the run-up in Rediff’s (Nasdaq: REDF) stock price as well.  We will have to see the pattern the next few days. 

What does the deal mean for Sify?

First of all, Sify only has a 74% stake in SifyComm as the rest of the stake is held by Infinity Satcom Universal (P) Ltd, which coincidentally is owned by Mr Anand Raju, the brother of CEO Raju Vegesna.  The reason is that the existing regulations stipulate that not more than 74 per cent of the issued, allotted, subscribed, and outstanding share capital of the company shall be held by Non-Resident Indian’s (NRIs). 

How does it affect the bottom-line? 

I am not sure how it affects the bottomline.  Sify’s VPN marketshare has been decreasing the last few quarters as competition has increased.  Recently, at&t (NYSE: T) also received the licenses for NLD and ILD.  I also read about British Telecom (BT) applying for licenses.  All of these international players as well domestic companies want a piece of the VPN business. 

According to this article, the NLD market in India is estimated to be around Rs 4,000 crore or $870 million.  Also, according to this article, ILD market was around Rs 4,346 crore in 2003-2004 and I am sure is much bigger now.  I am sure the increasing call center traffic play a role as well. 

The opportunity here is huge but the competition is also huge.  Will Sify be able to take advantage?

* I am long SIFY

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It seem like Sify (Nasdaq: SIFY) is heavily promoting its online MMORPG game A3India on college campuses, malls and movie theatres in major Indian cities. 

Here’s an article from GameGuru.in that describes the game itself and Sify’s marketing of A3India. 

The growth seems to be lacking for Sify after quarterly numbers came out and I have sold a portion of my holdings hoping to buy back at a lower price.  So far it has been the right decision.  Raju Vegesna needs accelerated growth from somewhere.  Growth will have to come from the international arena where Sify is seriously lacking but is said to be focusing on since Raju Vegesna took over as the CEO. 

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