Tata Communications Limited (TATACOMM) Earnings Call Transcript & Summary

Good evening, everyone and welcome to the Tata Communications institutional Analysts and Investors Conference Call. We are joined today by our MD and CEO; Mr. Amur Swaminathan Lakshminarayanan; our CFO, Mr. Kabir Ahmed Shakir; our Chief Strategy Officer, Mr. Tri pham; our Head for Collaboration and Solutions, Mr. Madhusudhan, Mr. Troy Reynolds, our Chief Legal and Compliance Officer; Zubin Adil Patel, our Company Secretary; and our Head for Investor Relations, Mr. Rajiv Sharma. Our acquisition of Kaleyra Inc. has been announced today and the details of the same are available on our website. I trust you would have had the chance to look through the key highlights. At the end of the management's remarks, you will have an opportunity to get the 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 with the risks and uncertainties we face. A detailed statement and explanation of these risks are included in our annual filings, which you can locate on our website, www.tatacommunications.com. The company does not undertake to update these forward-looking statements publicly. With that, I would like to invite Rajiv to share the initial brief followed by the opening remarks from Lakshmi. Over to you, Rajiv.

A very warm good evening to you all. I hope you got a chance to go through the press release and the investor presentation regarding our announcement that Tata Communication has entered into a definitive agreement to acquire Kaleyra Inc. Calera Inc. is a global multichannel integrated communication service provider, a global CPaaS player meeting the stringent needs of leading enterprises with robust product and platform offerings. And last reported revenues of USD 339 million in calendar year 2022. The estimated enterprise valuation for the transaction is seen roughly around USD 250 million. Equity shareholders will be paid fully in cash and the agreed price per share is USD 7.25 per share. The aggregate consideration is expected to be around USD 100 million as may be adjusted by any payments required to Kaleyra warrant holders or holders of restricted stock units, which vest upon change of control. This transaction has been approved today by the Board of Directors of both Tata Communications and Kaleyra Inc. Consummation of the deal is subject to approval by Kaleyra stockholders certain regulatory approvals and other customary closing conditions. Now let me invite our MD and CEO, Lakshmi, to discuss this further.

Hi. Hello, everyone, and a very warm good evening to all of you, and very pleased to meet you so soon post the Investor Day that we held the other month. Let me start from where we left on the Investors Day. We are taking another step towards strengthening our compact capabilities. Foremost, they're really excited about the CPaaS market, and this market is estimated to grow at 25% plus CAGR in the next few years to an estimated USD 27 billion. Most of this growth is seen from India, U.S. and APAC. Kaleyra Inc. has 54% of its revenues from U.S. and 13% from India and in a market leader in Italy, which contributes to 18% of its total revenues based on the last reported quarter. The company has a strong hold in sectors like financial services, which contributes 30% retail and digital commerce contributing 16% across the global markets. Top 10 customers of the company account for 45% of these total revenues, reflecting customer stickiness and platform robustness. With this acquisition, we will benefit from a strong talent pool of Kaleyra, which will work alongside team data communications to employ the digital transformation of our enterprise customers. This acquisition brings geographical complementarity play to our enterprise play in the CPaaS offerings. For instance, with our Tata Communications DIGO, we are strong in APAC. Kaleyra is strong in the U.S., and we both have good traction in India with not much enterprise customer overlap. Moreover, with our own enterprise play recently integrated the switch and now with Kaleyra U.S. operations, Tata Communications gradually strengthening its U.S. foothold. Our combined capabilities will enable us to serve an expanded customer base across geographies and scale our platform offerings globally. This will help us drive accelerated growth profitably, and our ambition for our combined CPaaS offering will be to achieve an EBITDA breakeven in the near term and a double-digit EBITDA margins in the medium term. I'm excited about Kaleyra's talent, as I said before, and the demonstrated capabilities in next-gen technologies. With this acquisition, we'll further build intelligent, intuitive and innovative multichannel communication solutions and create a category of customer interaction platform, which has been our ambition and unlock the new growth opportunities that lie ahead of us. Thank you.

Thank you, Lakshmi. We will now open the forum for Q&A. We will wait for a minute for the queue to assemble.

The first question is from the line of Sanjesh Jain from ICICI Securities. Sanjesh, you have now been unmuted. You may go ahead and ask a question after muting yourself. Sanjesh, you may go ahead now.

Sanjesh, you are not audible. Have you -- are you still on mute? Why don't we take the next question.

Yes. The next question is from the end of its Riddhesh Gandhi. Riddhesh, you have been requested to unmute, you may mute yourself and go ahead and ask your question.

Actually, as I said, this is obviously a loss-making entity. [indiscernible]. I just want to understand actually the synergies and the path to profitability and with the confidence we have with regards to achieving profitability and kind of roughly time line on this.

As I said, firstly, we look at the market opportunity, the entire CPaaS is a fast-growing market. And within CPaaS beyond SMS the market is growing in non-SMS channels like voice and other means of communication. So the market is growing and that is one major reason. The second is, obviously, this platform is in terms of proven in terms of scale and the customer base, as you said, complementarity on and aligns with our ambition to move and position in the customer interaction platform. Yes, this entity today is loss-making. But given the scale and the complementarities and the synergies available we are quite confident that we can make it EBITDA positive in the near term, as I said, and to a double-digit EBITDA in the medium term.

Got it. And we expect the profitability to be driven by synergies on the cost side or revenue growing, which actually intern increases the operating leverage in the business just for a [indiscernible].

Sorry, Riddhesh, can you repeat that question?

Sure. I see that the profitability will be driven by effectively synergies which we can drive on the cost side of things? Or is that effectively a revenue actually growth, which is going to and lead to operating leverage and then increase in the profitability?

It will be both. As the market grows, then we obviously will need to grow, and there are so much of growth potential, which is one. And the second is there are other levers available in terms of synergies right from the buying synergies to the other infrastructure and other synergies that we can realize that will -- which will help us to deliver the margin.

Understood. And just last question is that as we had outlined in the Investor Day, the aspirations and the revenue targets of ours, I'm assuming those are like organic and anything inorganic will be actually incremental over and above that? Or should we be considering this and the aspiration as well?

No. I think I mentioned during the Q&A at that time itself. When we put that aspiration up, that aspiration, obviously, we and we also mentioned that we are developing a set of pipeline for M&A. But we are not going to be acquiring to hit the aspiration revenue numbers. So it is not. So therefore, I can't say both of them go hand-in-hand. And I think [ Caverin ] his presentation called out the rationale and the logic that we would use to how we would go about doing this. And as you saw in the case of switch, where we showed there are complementarities available because of the market and products and everything else. Similarly here, there are a lot of complementarities available. And and the strategic rationale is quite strong, and that is the reason what we do.

The next question is from the line of Mr. Nishit. Nishit, you have been unmuted. You may go ahead and ask your question.

Can you hear me?

Yes.

Okay. Great. Firstly, [indiscernible] looks like it's earlier with acquisition and [indiscernible] were very, very excited for this. Second, I just wanted to understand, this is my understanding of the state and just would love to get your thoughts on it. So does -- I see most of Kaleyra's clients right now seem to be large enterprises, right? And they do not and it seems like there is a big opportunity on the ILD side of it, right, wherein you have so many countries where you are you have a proven platform and Tata Com has the relationship with some of those very, very large customers, which are very big ILD customers out there in multiple countries. Is that a big opportunity which can come with you guys for you guys?

Yes, Nishit. I don't particularly know what you mean by the ILD customers and presence. But largely, yes, as I said, there is complementarity from their focus on large enterprises and as is ours. So that is -- we are all addressing the similar segment of market. Second is they also have a large global play, but how shall I say, more focused around the U.S. and they have good interconnects in the U.S. focus, obviously, in India and the Italy market. From a market complementary perspective, Tata Com has a much broader footprint in terms of the markets, right, both in terms of our infrastructure and buying capabilities as well as our presence, for example, in APAC and in broader Europe, even beyond Italy and so on. So those complementarities will definitely help us to drive the synergies, both in terms of go-to-market as well as the synergies in the infrastructure footprint as well as the buying relationships that we can leverage each other from.

Correct. So lastly, what I meant by the ILD market for some of the very large hyperscalers like Amazon, Meta, Google and which have multi-country operations and which are very, very large accounts and which prefer to work with a stable platform across countries, right? And there, both Calera and you seem to have the tie-ups with telcos right? And but somehow, they I do see them as very large customers. So that's where I thought there was a very big opportunity because given Tata Coms -- given that the sector is going through -- this sector has -- there is a big -- trust is a very important factor, and Tata brings in a lot of trust in that sector. Is that a big opportunity was the question? Because it looked like you have very, very strong enterprises as a customer, which is very difficult to build, which is again a very, very good complementarity that as you were talking about. So that was the opportunity I was talking about.

Yes, I think -- yes, Sure.I think some of the big OTT like players and hyperscalers are our customers, and there is an opportunity there. yes, I think that's an opportunity. I think they are also present in certain accounts of that nature, and we are present in more number of accounts, if you will. And that certainly presents as an opportunity. the way I would see that as akin to our core connectivity portfolio where these are very large customers having buying power similar to a large player, and we can get bulk but may not be at the level of margins that we might get from other enterprise customers. But yes, certainly, I think that is an opportunity that we will work on. But broader than that, the other enterprise segments like the banks, large retailers, the digital commerce companies who are big users of messaging and now moving to more of omnichannels those who want to -- not to have a fragmented buying experience of SMS and voice and trying to integrate, whereas even in our case, the bigger the vision was to offer a more converged solution, a more omnichannel solution. So therefore, there's a lot of synergy both in terms of vision, road map and capabilities, and that presence is a great opportunity.

That's amazing. And actually, you have -- you get a 640 member team along with it. So is it fair to assume that a lot of those people have agreed to carry on out there? And also you would -- by building DIGO, you would have a very large deal inside. So again, build the road map will now be led by Calera being the specialist out here or we jointly driven out there?

We'll work through those initiatives. We just announced it, and it will take time to close the deal. And only after that, we can really enter into those conversations more meaningfully. But we do have -- we do have a vision. We do have a road map, but it's too soon to talk about.

Which is fair. And one last thing. And is it also -- is it right and need to understand right now, Kaleyra was just selling one particular product, right? But with the -- also the salespeople of Kaleyra can now sell a full suite of services to the entire -- all the relationships that they have in both Europe and U.S. Is that a fair, fair way to also think about it?

No, Kaleyra, not just SMS, they already have capabilities on multiple channels, right, in terms of video, in terms of voice and other channels. So they have that capability in the product that they have. Yes, I think once we consummate the transaction, I think our ability now to take it to a broader enterprise segment where we have presence in large customer base and have more holistic conversation in helping them to improve their customer interactions or consumer interactions will definitely improve.

This is very helpful and all the best for the integration national thing.

Unmuting Sanjesh. Sanjesh, you may now go ahead and ask a question post approval unmute. You are muted now, Sanjesh, please go ahead and ask a question. We can hear you Sanjesh please go ahead. Sanjesh, you're breaking up.

Sanjesh you're breaking up.

The next question is from the line of Mr. Mayank Babla. Mayank, you have now been unmuted. Please go ahead and ask your question.

Hello?

Yes, you're audible now. Please go ahead.

The debt -- the net debt of the company is around $150 million of Kaleyra and EBITDA of around $18 million, $19 million. What [indiscernible] attractive? Is it the client or the weakness in the platform? What is a for the [indiscernible]

Yes, meant, I think I've outlined the opportunities and the rationale essentially, the market opportunity was CPaaS as a market is growing fast. We have an opportunity to strike now with a player who has got scale in multiple geographies while we have strength in India and presence in other markets, they already have a reasonable scale in markets like U.S. And to get to that level of scale, organically for us will take time. So it brings therefore, certain market strength, a ready-made market strength besides the platform that is the -- and third is, there is a vision to build out the higher order of capabilities in terms of more intelligence into the CPaaS and that is an aligned vision that together, they can unlock greater synergies. And our net debt is noted, and that's where the enterprise value what we called out is included in the head end, taking that into account.

And sir, what will be the plans that we kept on the bar?

Kabir, do you want to take that question?

Yes. We will assume the debt of the target upon close. What will happen, whether the bondholders would like to continue, would like to exercise any rights that come from -- as a result of the offer document is up to the bond, I can't speculate on that.

Sanjesh, the next question is from your line. You may go ahead and ask questions please.

From [indiscernible] first, on the target business itself. Can you help us now [indiscernible].

Sanjesh, we can't we can't you're breaking up. No, perhaps you can send your query online and see if I can respond looking at the query Sanjesh [indiscernible] you're breaking up.

Is there any learning for us or we wanted to plug certain products profiles on the [indiscernible]? Can you hear me?

Yes. Yes, we're not able to hear you. You're breaking up quite badly. And so I was suggesting, Sanjesh, if you can message the question online. We'll try to read it and respond to that. You can't hear us properly.

I think it's probably not even able to get us please just continue with the questions, which is not coming through. Why don't we move to the next question.

The next question is from Santosh Sinha. Santosh, you may go ahead and ask a question. You have requested to unmute.

Impact is expected on the overall margin of the company because the guidance was somewhere around 23% to 25% for EBITDA margin of Tata Communication. So what will be the impact overall? And will this overall target of 25% change?

I can answer that. Firstly, I think I'll be tired of repeating myself. It is not a guidance, and it is not a target. We've always said that '22, '25 is our long-term ambition for the margin profile of Tata Communications, and we stick to the 23% to 25%. As a result of this acquisition, when we do the post close, I'm sure you can do the mathematics. This business is EBITDA negative as we speak $309 million of top line, it will have, of course, dilutive impact on the Tata Communications EBITDA performance. But that, we believe, is going to be short-term hit, and we intend to have this business in the near term, get into EBITDA breakeven. And in the medium term, short to medium term, they should get into double-digit EBITDA growth. So we can then get back to our long-term ambition of 23%, 25%, we continue to maintain. So we will as we mentioned in the Investor Day, I will repeat. We don't mind departing from this 23% to 25% range for good reasons. And for a short-term period. And this is definitely one of the strategic rationale driven acquisition for which it warrants us to depart from it for a short-term period.

That's helpful. Next question is regarding this approvals actually. So how much time you think that it will take? And what will be the key approvals that will be required. And Will the entity will be delisted from the stock exchanges?

I will start off and then maybe I can ask to the Troy. Troy is also there on the call, our Chief Legal Officer. Troy, if you can just unmute Troy and have Troy answer this question.

This is [indiscernible] okay. Can you hear me now? Apologies. This is a U.S. public acquisition, and they will -- it is also a take-private acquisition such as the closing, they will not want to be listed.

[indiscernible]

Was there another part of the question I didn't hear. The approvals, there are a number of approvals, most importantly, the shareholder approval. There are also certain competition authority approvals that will be required along with CFIUS, which is the Committee on Foreign Investment in the United States. Those are some of the major approvals. We expect it to be a 6- to 9-month approval process.

Thanks, Troy. The next question is from the line of Mr. Dipesh Mehta. Dipesh, you have been requested to unmute, please any and go ahead and ask your question.

Sorry, we can't hear the question in this room. Can you repeat it?

No, it's is still muted, I think. [indiscernible].

Dipesh you can unmute yourself and ask a question.

Have some sense about the product mix of the business, which we acquired.

Dipesh we missed you from the starting. Could you please restate your question from the beginning. Yes, the go ahead ask the question.

I just want to get a sense about the product mix. You said about the company is omnichannel kind of platform. So if you can just provide some sense about how the product mix is currently? And with the synergy benefit, how do you expect it to evolve over the next 3 to 5 years?

Yes. Dipesh, we have to see what is their publicly stated information as they are listed. We probably can't drive us more than what they are diverging in terms of the mix and so on. We do have SMS and non-SMS products in the mix. But in terms of the future, as I called out, the market, SMS is growing that the non-SMS part will grow faster and with their capabilities and what we are doing ourselves, we think we can leverage on that market opportunity to grow in the market.

I just want to understand it from Tata Communication existing capability perspective, what portion of business would be very similar to what Kaleyra does. If you can provide some sense. And then how this will overall integrate with both the ATP and because you are indicated some of the synergy benefits, particularly on the bulk pipe side, I understand. But in addition to that, anything which we have similarity in the operation and the competence.

Yes. I mean, we launched our DIGO platform last year. And underneath the DIGO platform, this is what we Kaleyra messaging capabilities, the A2P messaging capabilities that we have, the voice capabilities, which had programmable voice elements and others. So those are the capabilities. We are a relatively new entrant. We were having international large ATP in a wholesale model. And in the enterprise segment with the launch of gig from last year, we've acquired a good set of customers and growing. So in terms of the capabilities, product capabilities, I would say, Kaleyra ahead because they have been in the market, it's slightly mature. That platform carries a lot more volumes and scale now. So it's a lot more proven in that sense and that's a big advantage for us. And in terms of other synergies, I did call out, there are buying which you mentioned as well as other infrastructure synergies that we can look at in terms of the SMEs and we have these netting to deliver these messaging capabilities. So those are the places where these will work together very well.

The [indiscernible] I think first of the process, I think I missed the answer what you did about the transaction process, how you expect it to play out? And last is about the DIGO platform which we refer largely we are currently present in India or we have presence outside India also organically.

Yes. Organically, we have presence in India. We have presence in the APAC market. As I said, we launched last year. So these are the 2 places where we have acquired a significant amount of customers in Europe and U.S., we have opportunities that we are pursuing because this was a recently launched product in those markets. So that is the -- but in terms of process, I am not sure what you're alluding to. So we announced the acquisition today. We called out that it will take 6 to 9 months to receive all approvals and consummate the transaction.

The next question is from Mr. Mihir Manohar. Mihir [indiscernible] unmute you. You may go ahead and ask your question. Please go ahead and ask a question.

Am I audible?

Yes, Mr. Mihir.

Yes. Sir, largely wanted to understand on the margin part piece. I mean you looked at a breakeven kind of an EBITDA number in the near term and double-digit kind of number in the medium term. If you can throw some more light on the cost part of the piece, I don't know what kind of synergies are you looking specifically on the cost part? That will be really -- that was the question.

It's a little premature enough for us to get into every detail of the cost. It's at end of the day, it's a listed company, and the due diligence process only allows so much insight for us to be able to understand their cost profile. We do believe that since we are also on the journey with DIGO to invest in there and Calera has an established platform, just like we mentioned, they carry a lot more volume on their platform than us. So it's very well established. So we do believe that there are certain investments that we would have otherwise done to develop may not be required, and we could leverage Kaleyra's capabilities. And all of that is something as we close the transaction is when we will probably get insight in a lot more detail, and it will become clearer. We have made certain assumptions in the business case on the basis of which it made financial sense for us to go ahead with the acquisition. I don't have any more other can give you other than that.

Sure, sure, sure. And just one more question was there on the valuation part of the piece, $100 million valuation. So I just wanted to understand [indiscernible] that all behind it.

Well, it's a good value for both Tata Communications and Kaleyra shareholders. I can't say anything more than that, which is there in the public domain already to what the share price was trading and what the enterprise value is. And this is if I look at a 30-day VWAP, which 25% premium on enterprise value. If I look at last closing price, it's a 17% premium on enterprise value. So there are multiple data points. It all depends on how you actually commit. We look at it from enterprise value, and these are the 2 data points that I can give you. And it's a point, 0.8x EBIT to sales multiple that we have actually offered to Kaleyra, which we believe is great value, and both of the shareholders have a win-win out here.

So that's it from my side.

We have a couple of online questions to address. The first question is from the line of Mr. Avnish Tiwari from East Bridge Capital. Avnish has asked, Kaleyra had a minus $15 million EBITDA in CY '22 but adjusted for stock-based compensation and one-off costs, it was plus $19 million in CY '22, are you using the $15 million negative as EBITDA based while aspiring for EBITDA breakeven in the near term? How will the stock-based compensations and one-off costs move?

Yes, we are taking the $15 million as our base Avnish. The stock-based compensation is something which is WIP and is something which needs to be discussed both internally our HR teams upon close to decide what we will offer at that point in time. We need to offer a competitive overall compensation package for the Calera employees to remain engaged and therefore, that is something which is work in progress.

The next question is from Mr. Anmol Grover. Kaleyra's CY '22 P&L showed a $50 million impairment how much of these write-downs are still to come through? And what are these related to exactly? How do you plan to reduce the debt of the company? There's one follow-up question, which you can address after.

Well, these are related to their older acquisitions that they have done in the past. I think it is notably from Engage but I don't have any color on going forward. I'm sorry, I'll not be able to give you a forward view on it.

The follow-up question is on the EBITDA margins that we plan to break even in the near term and increase to double-digit margins in the medium term. Could you quantify what do you mean by the near term and the medium term?

Well, near term is near term and medium term is medium term. I don't -- if I could have quantified that then I probably wouldn't have used the words near term and medium term in the first place.

The next question is from Sanjesh. He types his questions and sent across. What is the difference between DIGO and the target company? What is the contribution of the SMS and the Whatsapp business?

[indiscernible].

In terms between DIGO and the target company offerings. What is the contribution of the SMS and Whatsapp business to the part of our portfolio?

From the offerings perspective, as I mentioned, the -- at A2P messaging WhatsApp voice and all of those are similar. The difference being that while we have launched our product and beginning to acquire customers in the early stages of some of these areas which are non bulky A2P. Kaleyra has a platform that has already proven and has scale and volume that it manages, so that would be very different. In terms of the second question of whatsapp.

And the contribution of SMS and whatsapp to the revenue line.

So as I said, I don't think I can give the color on that for them as to what that mix is, while we have some information. But I don't think I'll be able to give that color of SMS and whatsapp for them at this stage, yes.

A follow-up question from Sanjesh. Per gross profit margin is 25% to 50%, how is SEACOM planning to bridge the gap. Are the synergies possible as Tata Com has strong relations with global operators.

In the gross margin.

Gross profit margins.

Yes. I think the our [indiscernible] and what we are looking to is at the gross margin levels, we should become much, much better as we get and leverage the buying capabilities of both the companies. And also, as we increase the non-SMS part of the mix, whether it's the voice or other channels that mix will definitely improve the margins better. Those are the levers available. And obviously, below the line, there are other levers available to deliver the EBITDA margins, the double-digit EBITDA margins that we have called out in the medium term.

Thanks Lakshmi. This brings us to the end of the call today. May I request Lakshmi for his closing comments.

Thank you all. Thank you for joining us at a short notice. We are very, very filled about this transaction, this presents a major opportunity for us to establishing the customer interaction platform meaningfully in a very fast-growing market, not just in India but other meaningful geographies like the U.S., APAC and Europe. So with that excitement, I will sign off for now. Thank you.

Thanks, Lakshmi. Thanks, everyone. A recording of this call will be available on our website in the next 24 hours. You may refer to the [indiscernible]. Thank you so much. Any other questions may be written down, Investor relations @tatacommunications.com. Thank you. You may disconnect now.