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Ladies and gentlemen, good day, and welcome to the Tata Communications Q1 FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I'll now hand the conference over to Mr. Vipul Garg, Head of Investor Relations at Tata Communications. Thank you, and over to you, sir.
Thank you, Ray. Good afternoon, everyone, and welcome to Tata Communications earnings conference call. We are being joined today by Pratibha Advani, Chief Financial Officer. The results for the quarter ended 30 June 2019 were announced on Friday and the quarterly fact sheet is available on our website. I trust you would have had the opportunity to go through the key highlights. We shall commence today's call with comments from Pratibha, who will share insights on the business progress and financials. At the end of management's remarks, you will have an opportunity to get your queries addressed.Before we get started, I would like to remind everyone that some of the statements made or discussed on the conference call today may be forward-looking in nature and must be viewed in conjunction to the risks and uncertainties we face. A detailed statement and explanation of these risks are included in our annual filings, which you can locate at our website, www.tatacommunications.com. The company does not undertake to update these forward-looking statements publicly. With that, I would like to turn the call to Pratibha to share her views. Over to you, Pratibha.
Thank you, Vipul. Good afternoon, everyone, and thank you for joining us on today's call. I will commence with some details about organizational development of last quarter but you may already have heard. As you're aware, Vinod has resigned from the position of MD and CEO, effective 5th July, 2019 and has decided to pursue opportunities outside of Tata Communications. Vinod has been with the company for 15 years and has been instrumental in transforming the company into a leading, global digital infrastructure provider. We would like to thank and wish Vinod all the best for his future endeavors.We are pleased to share that Amur S. Lakshminarayanan has been selected to be appointed as the Managing Director and Chief Executive Officer of Tata Communications by the Board. Lakshmi, as he's normally called, official appointment confirmation and joining date is subject to the receipt of necessary regulatory approvals. We look forward to welcoming Lakshmi to team Tata Communications. We continue to remain focused to deliver on our strategic road map of profitable growth as the global digital infrastructure provider. I would like to share certain trends that are transforming the way enterprises are doing business and lead back to underline how we are positioned. Draw your attention to our media services portfolio, which has been in the limelight in recent times having just witnessed the conclusion of the biggest sporting event of the year, the ICC World Cup. Traditionally, revenue from sports comes from sales or broadcasting live but the popularity of on-demand streaming means digitally engaged viewers now expect far more control over how, when and what they watch. As a nation, we have not fully tapped the opportunities that digitalization offers within sports. We expect the global sports broadcasting and digital -- digitization market to touch $31 billion by 2024. Deeply connected technologies, such as augmented reality or AR, virtual reality and IoT will put fans at the center stage of an immersive experience where there will be frequent interaction between the fans, their teams, their favorite players and their brand sponsors. We see ourselves as enablers of technology and in this instance, as an enabler of the technology paradigm itself.Our solutions are helping sporting bodies, fans and brand owners and businesses all to benefit from these trends. We are associated with all major sporting events globally, and we aim to further strengthen our position through our differentiated offerings. Another pertinent example that I can share with you is that of connected vehicles, of which we have seen a few introductions in the country quite recently. Vehicle connectivity has become a key topic for all manufacturers and across all geographies. Our new global mobility platform enables vehicle connectivity across borders. It is designed to provide network-independent cross-border cellular connectivity that car-makers need today to deliver connected car services for both home and export markets.In a world where devices are born connected, a single global mobile network, enabled by API, automation and the Cloud, would not only give businesses unprecedented visibility and control over all connected things, wherever they might be, but also reduce costs. Our new platform continues to get excellent traction across industries and we have won a large order from a marquee automobile manufacturer. Recently, we also won a large deal from a global airline. These large deals will provide impetus to our overall revenue growth. In a short span of time, we have contracted 164 customers from new platform.During the quarter, we launched IoT marketplace in India. This offering is intended to bring together different partners, including device manufacturers, software developers to start up and system integrators to deploy and manage IoT solutions, all under one single platform. This marketplace can enable diverse customers from government, public sector units to enterprises and startups to choose from a range of offerings and services on a transparent plug-and-play model, enabling them to leverage IoT solutions to address their custom requirements.We recently operationalized our partnership with Cisco for our SD-WAN solution under the IZO platform. We aim to offer a fully managed hybrid network service that's a fit for digital businesses. This is going to be a resilient Cloud-ready network as a service which can grow and scale as needed, while ensuring predictable and secure access to data and applications.It has been designed to give businesses agility and reduce the complexity of network transformation. Our IZO suite of offerings provides a solutions that enables to transform legacy connectivity systems into a secure, scalable and high-performing global network across diverse locations. Through our solutions, an enterprise can get SLAs of a private network along with global reach of Internet. IZO has increasingly become an important part of growth services and is contributing significantly to the overall revenue.The landscape of doing business continues to evolve with data as the keystone. As a future-ready organization, we too are pursuing digital transformation of our key processes. This is making us more agile and at the same time, bolstering our agility to offer on-demand, ahead-of-the-curve solutions that can deliver significant benefits to our customers and provides an enhanced user experience.We have digitized Lead to Order processes for connectivity products through our Optimus platform. More than 1,000 customers are already using the platform, logging in over 1,500 orders.Before I start about our financial performance, let me call out some of the changes in financial reporting that have taken place this quarter. Effective April 1, 2019, the company has adopted the new accounting standard Ind AS 116 on lease accounting as notified by the government. As per new standard, a lease is considered as a contract that conveys the right to use an asset for a period of time in exchange for consideration. Accordingly, all leases will consist of amortization of right-of-use assets and interest expenses related to lease liability. This has led to a decrease in operating expense and a corresponding increase in depreciation and interest expense and has an impact on resultant surplus. We have provided a reconciliation statement in our quarterly fact sheet. Starting on the performance for this quarter, we've had started reporting all the metrics in INR, except net debt and CapEx. This will bring consistency and help in easier analysis. Accordingly, we have restated prior period numbers for comparison. Also, for our key subsidiaries, we have started to report numbers net of intercompany eliminations in place of -- instead of standalone numbers in our quarterly fact sheet. This is in line with how we view their performance.Consolidated revenue grew by 5.7% year-on-year and came in at INR 4,167 crores on the back of strong performance in data business. On a Q-on-Q basis, revenue declined by 1.8% primarily due to decline in voice and one-off revenue recognized in Q4 in our growth services portfolio. EBITDA for the quarter came in at INR 826 crores with a margin of 19.8%. EBITDA grew by 40.7% year-on-year, with a margin expansion of 490 basis points over the same quarter last year. On a Q-on-Q basis, EBITDA grew by 20.5%.We've had a favorable impact of Ind AS 116 adoption on EBITDA to the tune of INR 70 crores. On a like-for-like basis, EBITDA grew by 28.7% year-on-year driven by strong profitability growth -- profitable growth in our data portfolio. This growth translated to a PAT of INR 77 crores in Q1 as compared to a loss of INR 199 crores in Q4, which included impairment of our investment in STT.Now moving to our segment performance. Data business witnessed robust growth this quarter despite industry headwinds. Revenue grew by 12.4% year-on-year, which is an industry-leading growth rate and testimony of successful execution of our strategy. Strong growth in both traditional, which was up by 6.1% year-on-year and growth services, which was up by 29.2% year-on-year, has helped achieve this growth rate. Our data revenue for the quarter was INR 3,278 crores and witnessed a marginal decline of 1.9% Q-on-Q. This decline was due to onetime revenue recorded in growth services in last quarter and a significant decline in innovation service revenue as we had onetime stage PoC revenue in Q4 from the innovation product portfolio.EBITDA for the quarter was at INR 736 crores, witnessing a growth of 42.7% year-on-year and 25.1% Q-on-Q. Without Ind AS 116 impact, EBITDA came in at INR 669 crores, recording 29.5% Y-on-Y growth. Data services contributed 79% of the overall revenue and 89% to overall EBITDA. We have won large deals across our product portfolio, which has given an impetus to our overall revenue growth and profitability.Now moving to the performance within the data services portfolio. Traditional services. This portfolio has been under pressure during FY '19 due to operator consolidation but has now started to stabilize. Revenue for the quarter came in at INR 2,068 crores, witnessing a growth of 6.1% year-on-year. Within this portfolio, NPL grew by 31.5% and IPL grew by 10.3% year-on-year. EBITDA came in at INR 795 crores, witnessing a growth of 30.2% year-on-year and 21.8% (sic) [ 21.9% ] Q-on-Q. Margin for the quarter was 38.5%. Without IND AS 116, EBITDA margin would be 36.2%.We have been driving efficiency and productivity in this business to enhance profitability. We have made concentrated efforts towards effective churn management and customer churn is coming down. We have witnessed lower churn this quarter versus last year, which has partially helped in margin improvement and other one-off costs, such as cable repairs, et cetera, in Q4, which have now got normalized in this quarter.Moving to growth services. Growth services continued to witness strong growth. For the quarter, revenue was INR 768 crores, witnessing a growth of 29.2% year-over-year on the back of new deal wins and execution of deals in hand. On Q-on-Q basis, revenue declined by 1.5% due to onetime revenue of INR 25 crores recorded in Q3. This was disclosed in our last earnings call. EBITDA for the quarter was at INR 21 crores.Within this portfolio, IZO grew by 85%, MMX grew by 71% and security services grew by 69% year-on-year. Other than the above-mentioned products, we have won large deals across new -- our Global Hosted Contact Centre and other services during the last few quarters.As we start to execute on these deals, we will incur some upfront costs in coming quarters. These services are platform-based and highly customized for each customer, hence, requires a longer delivery period, which sometimes leads to delay in revenue recognition. We are confident that as we start to deliver these services, we will see higher ramp-up in growth and innovation services portfolio.Coming to our transformation services business. Revenue for the quarter came in at INR 300 crores, translating to a year-on-year growth of 23.4%. New deal wins has helped us to grow this business despite facing challenges. On Q-on-Q basis, revenue has declined by 5.1% because typically, in Q4, we get corrective maintenance revenue and this is seasonal in nature. You would recall that we have picked up from low-margin yields to showcase our capability and this has led to some profitability erosion. EBITDA for the quarter came in at INR 19 crores with margin coming in at 6.2% due to continued upfront investment in some these large deals that we are pursuing. Also, with growth coming from existing customers, there is an expectation of higher efficiency from these customers. We have healthy international order book, and as revenue from these deals kick in, we expect profitability to improve in the latter part of the financial year.Moving to payment solutions business. We continue to rationalize our ATM portfolio with a focus on profitability. In Q1 FY '20, we closed 486 ATMs. Currently, we have a total inventory of 12,399 ATMs. We have steadily improved margins by focusing on efficiency and productivity. While revenues grew by 6.2% quarter-on-quarter, EBITDA grew by 241% Q-on-Q and came in at INR 19 crores, with some benefit coming from IND AS 116. Average transaction per day per ATM for white label ATMs have moved to 93 in Q1 versus 88 in Q4. We have witnessed a steady increase in transaction number and our focus is to keep on looking at efficiencies and enhance profitability.Moving to the voice business. We continue to witness a decline in this portfolio which is in line with industry trends and technology outlook. There was a decline in volume this quarter, while the prices were largely stable -- while price is largely stable. Revenue for the quarter came in at INR 890 crores, decline of 1.2% Q-on-Q and 13.3% Y-on-Y. EBITDA for the quarter was INR 89 crores and witnessed a growth of 26.3% year-on-year and a decline of 7.6% Q-on-Q.We are enabled to maintain margin at 10% through temporary benefit of market shift. In long term, we expect these margins to stabilize in the range of 6% to 7%. CapEx for the quarter was at USD 45 million as compared to USD 60 million in Q4 FY '19.CapEx for traditional services was INR 36 million, while for growth and innovation, we invested INR 10 million. The balance CapEx was used towards BAU requirements of the business. Net debt as of 30th June was USD 1.248 billion, an increase of USD 16 million as compared to Q4. This marginal increase was due to salary hike and bonus payout to our employees during the quarter. Our average cost of borrowing for Q1 was 3.93%, which has marginally increased by 7 basis points over Q4.In Q1, we generated free cash flow of INR 315 crores, witnessing a growth by 447% over last quarter. This free cash flow is post CapEx, tax and interest.IND AS 116 impact on reserves and surplus in our balance sheet was INR 164 crores, which has led to decline in our net worth. To conclude, our strategic focus on offering best-in-class digital infrastructure solutions is showing results. The overall share of profitable data services is increasing, and performance during the quarter reflects the continued momentum.Robust growth in enterprise business of a little over 20% and growth services of 29% is testimony to the fact that we are now being considered a preferred digital transformation partner. Our data business has witnessed robust performance both in terms of revenue and profitability.We have a strong order book and we expect this trend to continue as we keep on executing on large deals. This brings an end to management commentary, and I will now request the moderator to open the forum for Q&A. Thank you.
[Operator Instructions] The first question is from the line of Sanjesh Jain from ICICI Securities.
One follow-up question on the order book. We used share this order book number. Can you give what -- how does it stand in Q1 FY '20?
So Sanjesh, well, yes, we were sharing the order book, but it is not something that we actually put out in our fact sheet. But our growth services order book has grown year-on-year by 17%. Traditional services has grown, as I recall, between 1% and -- 1% to 2%.
Okay. But how does the overall -- because I remember it was $1.4 billion in last quarter in GDS. What's the number in 1Q?
Sanjesh, you want to know what is our order book growth year-on-year?
No, no, not absolute order book. So we mentioned this $1.4 billion in previous call in March. So just wanted -- how does this number look in June?
Okay. Can I come back to you? I think this is still in the same range, Sanjesh.
Okay. This is in the same range. Okay. That's helpful. One on the traditional side. We had a margin of around 36.2% registered for IND AS. So what's the sustainable margin there? And was there one-off dealings this quarter in traditional services?
Like I mentioned, the traditional services portfolio did get the benefit of IND AS because the rental cost line has now moved from above EBITDA to the depreciation and interest line. This in traditional, as I recall, is close to INR 52 crores to INR 55-odd crores. Our normalized margins, I would think, would be more in the range of 34% to 35%.
So that's the margin, we continuously -- because we were earlier guiding of 30%, 31% adjusting for IND AS obviously. So where do you see this margin now stabilizing?
So I said in the range of 34%, 35%. And of course, this quarter, as I mentioned in my commentary, we also got a benefit of lower churn.
Okay. Okay.
And while the traditional portfolio looks Q-on-Q to have de-grown but that's primarily because of the FX impact.
Okay. On the Capex guidance, so what does FY '20 CapEx look like?
We had -- preferably more in the range of about INR 200 million.
So lower than what you -- what we used to do earlier in the range of INR 250 crores to INR 275 crores?
Yes.
So now this year, it will look like INR 200 crores.
Yes. That's right.
[Operator Instructions]
This just tells me that there are no questions. I guess we delivered on a strong quarter, and all of you are happy with the outcome and the results. On that note, I'd like to thank you all once again for joining us on the call and look forward to speaking to you all again in the next quarter. You have a good day. Buh-bye.
Sure. Thank you very much. On behalf of Tata Communications, that concludes the conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.