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Q1 Earnings Conference Call

Tuesday, August 19, 2014

Moderator: Good morning, ladies and gentlemen. My name is Yogesh and I am the moderator for this conference. Welcome to Rediff.com India Limited’s Q1 2014-2015 Earnings 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 Yogesh. Good morning everyone and thank you for being with us to discuss Rediff.com’s financial results for the first fiscal quarter ended June 30, 2014.

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 first fiscal quarter ended June 30, 2014, 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: Thank you Mandar. A warm welcome to you all. And, thank you for joining us on today on our first quarter conference call.

Our CFO Swasti Bhowmick will provide more financial details, but I’d first like to start with a few comments about our quarterly results, before providing updates on our business and the progress we have made in the last year.

Our basic strategy, as you may know is to retain and grow our 15 million engaged users through a variety of digital offerings and then earn our revenue from digital services we provide to these users and to businesses. What is significant about this past quarter is that our revenue stream which used to be dominated by advertising is gradually shifting away from this and now, is increasingly driven by revenues from our ecommerce marketplace and subscription revenues from our enterprise email and collaboration services. Thus, while our revenues this quarter were up 6% in rupee terms on a year on year basis, what this overall number masks is the strong growth in fees from our ecommerce marketplace, which has helped us offset the decline in advertising revenues. We expect this trend to continue in future quarters and expect revenues from our ecommerce platform to comprise a larger portion of our overall revenues.

Let me discuss the decline in advertising revenues first. Some of this decline is because key advertiser industries like India’s auto, consumer electronics, computer hardware, mobile service operators and financial services are going through difficult business conditions and thus have cut back their ad spend. In that sense display advertising is notoriously sensitive to economic conditions. The other and perhaps more important reason is that banner display advertising, on a worldwide basis is being re-invented by the arrival of native advertising and content marketing. However it will be a few quarters before these new forms rise enough in volume to make up for banner advertising’s decline.

I believe that for early internet companies such as ours a much more reliable and robust revenue stream will be from the digital marketplace. Let me take a moment to describe to you how we do business here. Small merchants list their product or service offerings on our marketplace and pay us fees for a variety of services: for listing, for giving them orders, for payment processing, for package tracking and for customer service. It is important to note that we do not own or operate warehouses, do not stock inventory either on our account or on our merchants’ account and we do not employ or manage people to make deliveries or collect money. The quality of our service is completely dependent on how we manage the information and data on our marketplace- how easy we make it for users to discover products through search, the range of devices through which we make our services available, how well we make recommendations, how easy and reliable our payment services are, and how well our algorithms manage payment risks and predict delivery times. You can see from our financial results how well we do these things: this past quarter we had a 27% Take Rate (Fees earned as a percentage of value of products transacted, a healthy +14% product margin and a customer return rate as low as 11% and 23% of the transactions on our market place were done through mobile phones. All these numbers speak about the value that our marketplace delivers.

The Indian eCommerce market is extremely active as you may have heard. Amazon has recently announced their entry, capital exceeding a Billion US$ have already been invested in the past eighteen months and we believe even more investments are expected in the next twelve months. In this growth period, many players are executing on a model which involve large warehouses, holding stocks, selling products below cost to quickly ramp up revenue. We believe or execution model will be a profitable niche in this exciting growth phase for Indian ecommerce.

Our other two growth engines - our Demand Side Platform for TV advertising called VuBites and our Enterprise Mail and Collaboration Platform called Rediffmail Enterprise are making progress. In the Enterprise Email business, where we provide a highly secured cloud email solution. Both these businesses are adding valuable customers and you will hear more about them in upcoming quarters. Our US business is a newspaper which is making a slow progress towards a digital existence.
Scale and profitability for us, we believe, will come once investment in India’s broadband infrastructure, particularly mobile broadband takes off; there are signs that the new, tech savvy and aggressive government we now have in Delhi will start working on this soon. I’ll now turn the call over to Swasti for a review of our financial results. Swasti?

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

All results are for our first quarters ended June 30th, 2014 and June 30th, 2013, respectively.

Overall revenues were US$4.08 million for the quarter ended June 30, 2014 as compared to US$4.11 million for the same quarter previous year. I feel it’s important to note that our overall revenues grew by 6% in Rupees. Within this, revenues from India Online were US$3.38 million, up slightly compared to the first quarter of last fiscal year and, primarily for the reasons Mr. Balakrishnan covered in his remarks. Total India revenue, includes online advertising revenues of US$1.62 million, a decrease of 26%, and fee based revenues of US$1.76 million, an increase of 49%.

Revenues from our US Publishing business were US$0.7 million as compared to US$0.74 million for the quarter ended June 30, 2014, a decline of 5%, though up 43% sequentially.

Gross Margins for the quarter ended June 30, 2014 were 31%, down from 44% reported in the prior year’s first quarter. Important to understand is that this is due to the increase in our ecommerce business and is due to revenue mix, rather than margin erosion. As ecommerce continues to become a larger percentage of our overall revenues, we expect our gross margins will be negatively affected.

Our operating expenses were up by 43% at US$4.70 million, as compared to US$3.28 million for the same quarter last year. This is mainly on account of expense of US$ 1.3 million relating to advertising expenditures, primarily for TV ads to further promote the Rediff brand and our offering. Excluding these additional advertising costs, our expenses were US$3.4 million. Consistent with our strategy over the past several quarters, we continue to actively and aggressively look to reduce our costs further and this remains a top priority.

Operating EBITDA showed a loss of US$3.44 million for the quarter ended June 30, 2014, as compared to an Operating EBITDA loss of US$1.47 million for the corresponding quarter last year. The loss was related to lower margins and higher expenses as I just noted. As you are aware, Operating EBITDA is a non-GAAP measure and we direct you to our press release dated today which sets out a reconciliation of Operating EBITDA to net income.

Depreciation and amortization expenses declined by approximately US$0.4 million, coming in at US$0.52 million as compared to $ 0.88 million.

Interest income declined slightly, as we reported US$0.3 million in interest income compared to US$0.35 million.

This resulted in a net loss of US$3.48 million for the quarter, or US$0.126 per ADS, as compared to a net loss of US$1.87 million, or US$0.068 per ADS, for the same quarter last fiscal year.

We have US$15.7 million of cash on hand to fund operations and remain comfortable with our capital position. We are confident of managing our costs to a level where we can expect the growth in revenues to offset the expenditure, in our continued efforts to bring the business to profitability.

I would now like to turn the call back over to Mr. Balakrishnan.

Thank you Swasti. We have over 15 million engaged consumers across devices and our digital marketplace platform is finding its niche in India’s fast growing ecommerce market, You have seen signs of a new Rediff emerging with online fee revenues growing this past quarter at a 49% year on year basis (58% in Rupee terms) making up for a decline in advertising revenue. The challenge now is to balance growth in this business with profitability.

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