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Q3 Earnings Conference Call

Thursday, January 24, 2013

Rediff.com India Limited Q3 FY 2012-2013 Earnings Conference Call

January 24th, 2013

Moderator: Good morning, ladies and gentlemen. My name is Sourodip Sarkar and I am the moderator for this conference. Welcome to the Rediff.com India Limited Conference Call. For the duration of the presentation, all participants’ lines will be in the listen-only mode. After the presentation, a question and answer session will be conducted for the participants. I would like to hand over to Mr. Mandar Narvekar. Thank you and over to you.

Mandar Narvekar: Thank you Sourodip. Good morning everyone and thank you for being with us to discuss Rediff.com’s financial results for the third fiscal quarter ended December 31st, 2012. I would like to introduce you to the members of the management present on this call, who will take you through the highlights of the company’s performance. We have with us Mr. Ajit Balakrishnan, Chairman and CEO; and Mr. Swasti Bhowmick, CFO. As mentioned earlier, all of you are currently on a listen-in mode only. This conference call will last for about 20 minutes and then we will be glad to answer any questions that you may have. For your immediate reference, we have also posted the earnings release for the third fiscal quarter ended December 31st, 2012, dated today, on our website at investor.rediff.com You may also call me at our Indian office at +91 22-6182-0000, and we will be glad to fax or email you a copy during the course of this call. Before proceeding, I would like to mention that during the conference call, except for the historical information and discussions contained herein, statements may constitute forward-looking statements for the purpose of the safe harbor provision under the US Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as may, will, expect, believe, will continue, anticipate, estimate, intent, plan, contemplate, seek to, future, objective, goal, project, should, will perceive or similar terms, variations of those terms or the negatives of those terms. These statements involve a number of risks, uncertainties, and other factors that can cause actual results to differ materially from those that may be projected by the forward-looking statements. These risks and uncertainties include but are not limited to a slowdown in the economy worldwide and in the sectors in which our clients are based, a slowdown in internet and IT sectors worldwide, competition, the success or failure of our past or future acquisitions, attracting, recruiting and retaining highly skilled employees, technology, acceptance of new products or services, the development of broadband Internet and 3G networks in India, legal and regulatory policies, managing risks associated with customer products and a widespread acceptance of the internet. Listeners should carefully review the risk factors and any other cautionary statements contained in our latest annual report on Form 20-F and other reports filed by Rediff.com with the U.S. Securities and Exchange Commission from time to time. These reports are available on the SEC website, from the SEC’s offices in Washington, D.C. and on request by emailing us at investor@rediff.co.in. Rediff.com and its subsidiaries may from time to time make additional written and oral forward-looking statements. Rediff.com and its subsidiaries do not undertake to update any forward-looking statements that may be made from time to time by Rediff.com or on its behalf.

I would now like to introduce Mr. Ajit Balakrishnan, our Chairman and CEO.

Ajit Balakrishnan: Good morning and thank you for joining us on this call. We appreciate your continued interest in our company, and I am pleased to announce, that we continued to make progress in executing our strategy in our 3rd fiscal quarter, ended December 31st, 2012.

Consistent with my remarks during our last quarter conference call, we remain focused on growing our business…particularly some of the newer, online initiatives we’ve embarked on. We continue to extend the reach of the Rediff brand across the India market, looking to offset some of the weakness in advertising and both business and consumer spending. And we continue to aggressively manage our cost structure to preserve capital and be opportunistic in our investments.

During the third quarter and now for three quarters in a row, we saw sequential growth in our core business of online advertising in India, and the ecommerce and subscription businesses we operate. While our year-to-date comparisons are lower in the face of the challenging economic landscape in India, we are cautiously optimistic given the sequential growth in revenues and we do believe this trend should continue. The growth we are experiencing, albeit modest, is the result of our continued efforts in the form of a revamped sales strategy for ecommerce, subscriptions and online and .local TV advertising, supported by more focused investments on growth-driven programs. I will provide a brief overview on the unfolding internet scenario in India and on some facts that have direct implications on our business. I will also brief you on the progress of our businesses and the quarterly performance. Our CFO Swasti Bhowmick will then discuss the financial performance in detail. Following the presentation, we will open the call for questions.

As per the latest available statistics from ComScore, the Indian Internet market is now at 71 million active users with a growth rate of 51% year over year. This also compares to 66 million active users as of September 30, 2012, an increase of 7.5% in just three months-time. Additionally, with 16 million active users, Rediff commands a 23% market share in the Indian Internet market, and our user base has grown 15% in the last three months. These figures are as per ComScore.

According to the Telecom Regulatory Authority of India, the active mobile subscriber base in India was 707.28 million as of November 2012 and the broadband subscriber base grew 13% to 14.88 million in the same month. This, we believe, is the most recent published data. The broadband penetration is growing slowly and currently is a fraction of the total Indian population. However, we remain optimistic about the growth potential of the Indian Internet market as infrastructure investments continue, and as I just mentioned, we are pursuing activities aimed a positioning Rediff for more rapid growth in the years to come.

Despite the continued economic slowdown and global uncertainty, our core business, India Online, grew 7% sequentially in dollar terms over the past fiscal quarter. This is the second consecutive quarter that this segment has registered revenue growth. During the third quarter, we saw an increase in spending by our clients primarily in the Banking, Financial Services and Insurance sectors, as well as in Electronics and IT products and Online matrimony services.

Besides the growth in our quarterly India online revenue, our adjacent businesses namely Ecommerce, Subscriptions and Local TV also showed continued signs of expansion. For example, our Ecommerce business in the quarter ended December 31, 2012 increased 95% year on year as compared to the 61% year on year growth we announced in the previous quarter. The total number of merchants on our online marketplace has increased from 510 to 620 to 670 over the past two quarters, while our SKU range has also increased from 138,000 to 172,000 to close to 184,000 SKU’s over the same time period. This equates to over 30% growth in both our vendor base and SKU’s over the past six months. Additionally, we have successfully grown our ecommerce business while maintaining a positive margin of 12%.

In our Local TV offering, where we enable local businesses to advertise on National Channels in specific Cities, we have added three more channels. Apart from Zoom, NDTV Good Times, Times Now and ET Now, our service has been extended to include three more channels - namely UTV Movies, Bindaas and ABP News. The reach of our offering covers ten local and strategic markets for us - Delhi, Mumbai, Pune, Ahmedabad, Baroda, Surat, Mysore, Bangalore, Indore and Jaipur. With this, our Local TV advertising business now has a potential reach of 80 million individuals across these 10 cities. 189 local merchants from these 10 cities have taken advantage of the opportunity of being able to advertise on National channels using our Local TV advertising service.

Today, India has over 30 million micro, small and medium enterprises as per the Ministry of MSME and a total of over 700,000 registered companies as per the Ministry of Corporate Affairs, Government of India. Our Paid Mail business targeted at this addressable market is gaining traction. We use our popular Rediffmail platform to offer these clients business email on their own domain, along with administrative controls, a free domain and website and email on mobile feature that works across most phones. About 234 large corporate businesses, including some of the most well-known brands such as Dr. Reddy’s Laboratories Ltd., Videocon Telecommunications Ltd., Bajaj Auto Dealers, HDFC Life, HDFC Sales, Bajaj Finance and RP Sanjeev Goenka Group subscribe to our Paid Mail business today and we are working hard to increase our reach among smaller to mid-size corporations.

Another key part of our strategy has been to reach the mobile market in India and some of our more recent initiatives have been centered on mobile phones and smart phones and, developing applications and offerings that appeal to the India demographic. We believe that people want news…people want secure mechanisms for online transactions…people want easy to use email applications and quick…and let’s not forget content, which continues to be key for consumers. Mail and News are really the top activities done on mobile devices and through Rediffmail and our Realtime News offering, we are reaching this market. I will add that during the third fiscal quarter just ended, our Real Time News service became available on the recently launched Windows 8 platform and was already operating on the popular Android operating system. Our applications are now available on all of the leading mobile operating systems namely – iOS, Android, BlackBerry, Windows, Java and Symbian.

We’re leveraging our 16 million unique visitors and focusing on what has been reported by Nielsen Informate Mobile Insights to be, a 27 million smartphone user base in urban India, in particular, which represents a small fraction of the total urban mobile phone user base…approximately 7% also as per Nielsen Informate Mobile Insights.

We’re seeing the growth and adoption of smartphones everywhere in India and this is why we are focusing many of our advertising and ecommerce and technology offerings on the mobile market.

Our strategy has not changed and I continue to believe Rediff will be one of the primary beneficiaries of the anticipated growth in India broadband and mobile expansion over the coming years. Our goals remain to:

1) drive growth

2) increase margins

3) lower our cost structure and drive bottom-line performance, and

4) increase shareholder value.

Equally important, there’s a fifth goal: We have a long-term vision to make Rediff the destination of choice for online news, entertainment and communications throughout India and we’re operating our business with the long-term in mind. We want to build a sustainable business and provide India’s home and mobile communicators with the solutions they need. This will help us extend the reach and value of the Rediff brand and enable us to achieve those 4 goals.

Swasti Bhowmick, our CFO will now provide you with details of our financial performance.

Swasti Bhowmick: Thank you Mr. Balakrishnan and good morning to all.

Overall revenues for the third fiscal quarter ended December 31, 2012 were US$3.97 million, down 18% over the corresponding quarter last fiscal year, but also up by 3% sequentially over our 2nd fiscal quarter.

Within this, revenues from India Online were US$3.20 million, a decrease of 18% over the corresponding quarter last fiscal year. As Mr. Balakrishnan noted however, India Online has now posted another quarter of sequential growth and we believe we’re positioned well to see this continue to increase over the coming quarters.

Total India revenue includes both online advertising revenues and fee-based revenues. These totaled US$2.12 million and US$1.02 million, respectively, in the quarter ended December 31, 2012. Note, our advertising revenues declined by 30% year-over-year due to softness in select industry verticals, but our fee-based revenues grew 18% year-over-year, helping to offset some of the weakness in advertising spend we have seen.

Our fee-based revenues are up due to the growth in online shopping. We continued to see declines in revenues from Mobile VAS driven by stricter enforcement of the “Do Not Disturb” policy laid down by TRAI, but our Local TV advertising showed an increase of 65% in Rupee terms, which more than offset this.

I will add, that we are taking steps to increase our customers advertising by offering new solutions and new packages and there are some vertical sectors which have begun to increase their spend, which is a positive sign for the economy and our business.

Additionally, revenues from our US publishing business were $0.77 million for the 3rd quarter this fiscal year, a decrease of 17% vs. the 3rd quarter last fiscal year.

Our gross margins for the quarter ended September 30, 2012 were 38%, compared to 47% for the same quarter last fiscal year. This change was mainly on account of the decline in revenue as a large portion of our cost of goods sold is relatively fixed in nature. As revenues ramp up, we expect to see improvements in our gross profit margins accordingly. Additionally, our gross margins were up 3% on a quarterly sequential basis.

Operating EBITDA showed a loss of $2.0 million for the quarter ended December 31, 2012, as compared to an Operating EBITDA loss of $1.73 million for the corresponding quarter last year. As you are aware, Operating EBITDA is a non-GAAP financial measure and we direct you to our earnings releases dated today and January 24, 2013, which set out a reconciliation of Operating EBITDA to net income.

Depreciation and amortization expenses increased to $0.93 million for the quarter ended December 31, 2012, compared to US$ 0.81 million for the corresponding quarter in 2011.

During the quarter ended December 31, 2012, we exited from one of our equity investments, which accounted for a one time gain from the sale of investment of US$1.40 million included under the heading Other Income.

Interest income for the quarter decreased to $0.51 million, as compared to $0.56 million for the quarter in the previous year.

During the quarter ended December 31, 2012, we recorded a non-cash goodwill impairment charge of $2.0 million arising from our acquisition of the print news paper “India Abroad” in the United States in 2001.

Net loss for the quarter ended December 31, 2012 was $3.0 million, as compared to a net loss of $1.2 million for the comparable quarter in the previous year. Net loss per ADS for the quarter was $0.109, as compared to net loss per ADS of $0.043 for the same quarter last fiscal year.

Our total cash and cash equivalents stood at $21.1 million (Rupees 1,157 million) as of December 31, 2012, as compared to $25 million ( Rupees 1,330 million) as of December 31, 2011. We believe that our cash resources are sufficient to execute our strategy and that our balance sheet provides us with the flexibility to do so. As we look at the remainder of the current fiscal year, with substantial new investments to be made by industry and by government, we are hopeful that our business will return to growth, and we expect to re-invest cash from operations in part to continue to broaden the reach of Rediff throughout India. That concludes our review of the results for the third quarter ended December 31, 2012.

Ajit Balakrishnan: Thank you Swasti. We are going to continue to stay the course as we believe in the long-term future of India. We have a large population that we believe is craving technology, content and speed. By expanding our reach, whether through online, mobile, print or TV, we are reaching new markets and hence, new consumers. We’re going to maintain tight controls on our capital spend to ensure we have the resources to invest as needed and we will continue to be opportunistic and aggressive, as economic conditions improve. Growth is what we’re focused on and hopefully, as evidenced by the past two quarterly results, you can see that we are starting to make better progress sequentially. I’d like to thank you all for your continued patience and support.

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