Tata Communications Ltd

NSE:TATACOMM

Earnings Call Transcript 2021-Q3

[Vipul Garg, Head of Investor Relations]

Good afternoon, everyone, and welcome to the Tata Communications Earnings Conference Call. We are joined today by our MD and CEO, Mr. Amur Lakshminarayanan; and our CFO, Mr. Kabir Ahmed Shakir. The results for the quarter ended 31st December 2020 have been announced yesterday, and the quarterly fact sheet is available on our website.I trust you would have had the chance to look through the highlights. We will commence today's call with comments from Lakshmi who will share his thoughts on the business and long-term outlook, followed by Kabir who will share his views on the financial progress achieved. At the end of the management 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 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 Lakshmi to share his views. Over to you, Lakshmi.

[Amur Swaminathan Lakshminarayanan, MD, CEO & Director]

Thanks, Vipul. Good afternoon, everyone, and thank you for joining us today for the Tata Communications Q3 and the 9-month YTD FY '21 earnings webinar. Wishing you all a very happy new year, and I hope all of you are safe and healthy.Firstly, let me welcome our new CFO, Mr. Kabir Ahmed Shakir, to the family. Kabir is a global finance and business leader with nearly 3 decades of leadership across diverse industries and geographies. He was the CFO at Microsoft India before joining us here. Before Microsoft, he spent 23 years with Unilever where he built his leadership, finance and business acumen through diverse leadership roles across the globe. Kabir is also an angel investor, a Board adviser and a mentor to many start-ups. We're very excited to have him on board and confident of his leadership skills to help us realize our vision of becoming the global leader in enabling digital ecosystems.Coming to this quarter, we witnessed a stable quarter during these tough times. While our revenue growth was a little lower than expected, our profitability continues to be robust. Our long-term growth outlook remains strong. We continue to execute on our strategy, and we are on track to achieve our stated objectives.We've made good progress. Profitability and cash flow generation of the business has improved significantly in the last few quarters. Cost optimization measures have started to yield results, and savings have been banked.EBITDA for the quarter was at INR 1,046 crores, witnessing a 37.5% year-on-year growth. Profit for 9 months of this financial year is INR 951 crores, translating into an EPS of INR 33. We've witnessed a fivefold jump in our profit as compared to the same period last year.Revenue for the quarter was at INR 4,223 crores and was flat on a year-on-year basis. As communicated earlier, Q3 is a seasonally weak quarter, but revenue growth for our data business was impacted due to various reasons, and I'll explain them in detail during this call.Firstly, there's an aspect of seasonality. Usage-based revenue is lower in Q3 due to holidays in the season. Growth services where a large part of the revenue of the growth services is usage-based, where we were affected this quarter.Second, COVID-related weaknesses. Within the Growth Services, media and mobility businesses were affected by COVID. While in media, we've started to witness a recovery with the resumption of sporting events and travel, it's still lower than the pre-COVID levels. On the mobility, we have been impacted by lower roaming as well as lower usage, where we have some of the customer segments like airlines where the usage has been now.Delivery of the order book was also slower due to imposition of lockdown in a few countries in Europe. We also witnessed some churn from the customers due to cancellation -- consolidation in their offices and rationalization of bandwidth, which we believe is temporary, and this will pick up again.Third are some specific events. Firstly, increased IUC charges for India termination enforced by the regulator has adversely affected us, and we witnessed some volume churn in enterprise voice. We believe this volume churn is now largely complete, and the future impact will be minimal.We were also affected by a ban on China OTT players in India, as some of them were our customers. A mix of all these factors led to a slower revenue growth in Q3, but our demand outlook remains robust. We expect recovery and acceleration in the coming quarters.I will not talk about the product segments and the opportunities that we see ahead. Networks continue to be our biggest portfolio and strength. We have a dedicated enterprise-grade global network suitable for large multinational enterprises, operating in multiple geographies. All our network elements, such as MLD, metro area network, wireless access and data center to data center connectivity have been made future-ready.All new platforms and technologies being deployed in the network are designed to make the network more intelligent and programmable. In the cloud-first, Internet-first era, we believe the network will be a common set that will hold complex IT architectures together, and the importance of network will increase manifold. We're witnessing a trend where, going forward, private networks will be replaced by a mix of Internet and hybrid networks. We are actively participating in this trend through our offerings like IZO WAN and the variants of IZO which we are about to launch as well as other hybrid connectivity platforms.We are also actively participating in the growth of cloud and data center by providing dedicated DC to DC connectivity corridors. Our IZO WAN and Internet revenues have grown by healthy double digits on the back of these trends. Overall, our traditional services revenue has grown by 6% year-on-year.Next is Unified Conferencing and Collaboration, which is another focus area for us. During these pandemic times, we've all witnessed the importance of collaboration platforms. There are 3 components in this portfolio. One, deployment and management of collaboration apps, like Teams and Cisco WebEx, et cetera; second is cloud-based contact center solutions; and third is SIP trunking.While we witnessed strong growth in the first 2 segments, our SIP trunking segment, which is largely usage-based, has been affected. In SIP, we earned revenue where our dial-in numbers are used to join conference calls, and due to lesser travel and people working from home where people use their Internet, this segment has been temporarily affected.This segment was also affected by seasonality as well as the IUC increase that I referred earlier. We believe that this segment will revive as the economy opens. Our consolidated UCC portfolio grew by 7% year-on-year.In this portfolio, we are also relooking our platform story and our business model in this space. We are targeting a fully managed UCC deals, where the fixed revenue component is higher than the usage-based revenue.In Q3, we won a large UCC deal from a Fortune 500 company, which is 1 of the market leaders in building solutions, having operations in 150 countries and more than 100,000 employees globally. Our fully managed solution will help the customer to transform their on-premise legacy voice infrastructure into a cloud platform using Microsoft Teams and enable PSTN calling for 26,000 users from their laptops and phones instead of their hard desk phones as in the past. On successful delivery of this platform, our customer will benefit from a lower fixed cost, a superior user experience, reduced hardware footprint, improved mobility of work-from-home users and a secure cloud calling platform. We are witnessing a trend where enterprise voice traffic is gradually moving to cloud-based calling, and this gives us an opportunity to comprehensively address the cloud communication needs of our customers. We continue to work on our UCC and CPaaS offerings where we will be introducing new features and innovations in the near future.Customers are rapidly adopting or have been rapidly adopting the cloud applications and migrating workloads and applications from in-house data centers to cloud. At the same time, working from home has disproportionately increased the attack surface of organizations as endpoints and traffic flows have moved beyond the secure perimeter of the office network. This is the reason why cloud and security is a big area of focus for us.Our IZO Private Cloud is a fully managed platform that enables enterprises to integrate, manage and control their distributed IT environment with ease, consistency and better control. Our cloud has integrated security, which protects infrastructure from unauthorized access and threats. Along with that, we partner with large public cloud providers like Azure and AWS to orchestrate a multi-cloud setup, simplifying the management and monitoring the most complex cloud environments, thereby enabling a unified cloud experience.Our managed security portfolio has evolved into an end-to-end security services portfolio across all stages of customer maturity. Our security offerings draw on the best practices from industry-leading frameworks to support organizations as they build robust future-ready cybersecurity programs.This quarter, our cloud revenue growth was a little subdued due to slower deal conversions in Q1 and Q2 for both cloud and security. There is a shift in the mix from a contribution from pure resale of public cloud or equipment, which is a low-margin business versus a share of fully managed hosting and security solutions, leading to a better quality of revenue and margins. This is helping us achieve our profit -- our goal of profitable growth.Our cloud hosting and security portfolio grew by 8.6% year-on-year. And within this, our security services grew 29% year-on-year. For both these products, we have a strong funnel and the opportunities are expanding. In Q3, we won a large, complex, a one-of-its-kind network, cloud and security deal from one of the leading metals and mining companies in India. All major enterprise applications like SAP will be moved from an on-premise data center to fully managed cloud, including our IZO Private Cloud and HANA Grid. This will be one of the largest HANA deployments in India.We are also providing disaster recovery solution through replication of cloud, connectivity to cloud infrastructure and an overlay of security. Along with that, the customer will get a single pane of glass through our IZO command to monitor applications, connectivity and multiple cloud environments in real time. This is a good example of digital transformation, which will help the customer to bring agility in its business operations, along with complete visibility on infrastructure and SLAs.Forward-thinking enterprises have already incorporated process automation, IoT and AI into their digital planning. The past few months have magnified these opportunities, and several new use cases for mobility and IoT have emerged. Mobility and IoT will be a future growth driver for us and continue to scale our offerings and we look at new use cases. The portfolio has been affected by COVID-related slowness.For our MOVE offering, we are working on 3 major areas. One, airlines. We've already signed up a few large customers, but this business segment continues to remain affected due to COVID-related restrictions. Second is auto OEMs. We've started to see some recovery in this segment, but the scale-up in volumes is still slow. We've recently signed up some new auto customers, and we expect them to scale gradually over the next few quarters. We're optimistic about growth in this segment. Third, semiconductor industrials. This is a new segment that we've launched recently, and we are excited about the opportunity ahead. We are collaborating with Micron Technology to create a worldwide cellular-enabled connectivity solution that will simplify and accelerate the large scale global deployment of IoT devices. Our global mobility solutions will offer a pervasive end-to-end offering for a zero touch onboarding of connected IoT devices to cloud services across 200 countries and territories, backed by our relationships with 600-plus mobile network operators worldwide. The solution will unleash innovation in an expanding IoT services ecosystem, which is expected to grow in the future. The solution will enable highly scalable IoT security, seamless global connectivity, on-demand cellular-enabled subscription and pay-as-you-go flexibility.This quarter, we've acquired a controlling stake of 58.1% in Oasis Smart SIM Europe, a French headquartered eSIM technology provider. Oasis develops and provides advanced technologies and personalized services to enable the deployment of eSIM and SIM technologies. With this investment, eSIM technology will be fully integrated into our MOVE platform, enabling an end-to-end embedded connectivity solution and strengthening the MOVE as a single source platform for global enterprise mobility needs. We will create and accelerate the product road map, R&D, while Oasis will leverage and amplify the growth in the mobility and IoT markets.Momentum from our enterprises business is maintained and showing an upward trend. We witnessed a healthy year-on-year increase in our order book and funnel. For our SCDX solution, we are extensively working with customers, both in India and internationally, across banking, retail and automobile sectors with interactions at various stages. We expect to close a few of these proposals in the coming quarters.We formed a global service design hub in India to support large deals globally in a hub-and-spoke model and to enhance the underlying service processes. This is helping us to work on large complex network transformation deals. And due to these capabilities, we are now able to participate in deals where we were not participating earlier.We are actively engaging with our customers and working on a few large multi-country, multi-product deals. And we are witnessing early signs of pickup in enterprise demand, but largely conversion is still taking longer than expected. And as I said, we have a strong funnel.We have reimagined our role to be a digital ecosystems enabler. In line with this strategy, we recently reorganized our product organization into 3 separate business units, focusing on global technology, network and operations; the second being mobility and collaboration; and the third, focusing on cloud, SD-WAN and security.Each of these units will be headed by a senior leader reporting to me. This will help us to strengthen our focus on solving customer problems, engage deeper with them and deliver a seamless customer experience and bringing the necessary leadership focus from within our company. Our customer consolidations are now solution and services-led and stitching our products together to address the customer and market trends and needs.To conclude, we are witnessing a digital transformation of business globally. Cloud-first, Internet-first strategies have become integral part of the enterprise networks and IT architecture. We see this current situation as an opportunity, and we are investing in all of the areas, as I have alluded in my earlier remarks, and we are fully geared to leverage and capitalize on this opportunity.With that, I will ask Kabir to take you through the financial highlights. Thank you.

[Kabir Ahmed Shakir, Chief Financial Officer]

Thank you, Lakshmi. Good afternoon, everyone. It is indeed my pleasure to talk to you for the first time. Thank you once again for joining on our Q3 and 9-month FY '21 earnings call.Let me just take you through the details while Lakshmi has briefly touched upon the financial performance for the quarter. We rolled out our new strategy at the start of this fiscal when the pandemic had hit us. No one anticipated the challenges and impact of this global crisis. As a company, I'm glad that we have been resilient and agile. We relooked at our processes, we optimized our costs, reorganized our business and product strategy to cater to the changing demands and needs of our customers, and the journey continues.These changes reflect in our numbers, too. Both business and financial parameters are tracking in the right direction. The demand outlook and the conversations that we have with our customers gives us the confidence that we are on the right track. Our consolidated revenue for the quarter came in at INR 4,223 crores, which is just about flat on a year-on-year basis. Voice business declined by 16.6% year-on-year due to lower traffic, and data business grew by 3.8% year-on-year and compensated for the voice decline. Q3, as Lakshmi mentioned, is typically a weak quarter from a seasonality point of view. And our data business revenue growth was lower than expected due to the reasons that Lakshmi outlined earlier. New deal conversion is still taking longer due to the uncertainties in the business environment, but we are witnessing early signs of recovery.The demand outlook for our products and services is robust, and we have a healthy order book and funnel. As we win new deals and execute our order book, we expect our financial parameters to accelerate in the coming quarters. There has been some softness in revenue, but our profitability continues to be robust. As Lakshmi mentioned, we have taken a lot of cost optimization measures in the last few quarters, and the results are visible.Our EBITDA margins have significantly expanded. During this year, we banked structural cost savings of INR 100 crores per quarter. The employee mix between India and international has been optimized to achieve the right operating structure, which helped us in delivering a good manpower cost efficiency. Along with that, we also looked at our processes, sourcing policies and brought efficiencies in other line items as well. This is an ongoing process, and we aim to maintain agility in our cost structure to compete effectively in the market.Consolidated EBITDA for the quarter came in at INR 1,046 crores, witnessing a growth of 37.5% year-on-year, with a margin of 24.8%, resulting in an expansion of 680 basis points over the same quarter last year. Sequentially, there has been a decline in EBITDA. You would recall that we had called out one-off gain in -- of INR 43 crores in Q2 last quarter. This quarter, EBITDA was also affected by timing difference in our voice business of some revenue being booked earlier and the cost of which reflected in this quarter. This led to an impact of about INR 31 crores on EBITDA in the current quarter. For the last 2 quarters, we've been getting a cost benefit of about INR 50 crores per quarter due to COVID-related lockdown. As the economies have opened up, some of these benefits have started to go away and costs have started to normalize. Some of the business-related expenses that were held back due to COVID are now being released due to which you see the impact on EBITDA in this quarter. In Q4, we expect these costs to come back at a normalized run rate.We have an extensive submarine cable network across the globe. And this network is affected by the vagaries of weather, wear and tear and cable cuts regularly. There have been some cuts on some of our routes. We'll be doing the repair along with the regular maintenance in Q4, and consequently, we expect some of these costs to come up in Q4. PAT for the quarter was at INR 309 crores, witnessing a healthy increase of 428% year-on-year. Within data, Traditional Services continue to witness robust growth. Revenue grew by 6% year-on-year on the back of strong demand across all segments of customers. We saw very strong growth from OTT and enterprise customers due to the trends around cloud adoption and digitization.Growth Services revenue grew by 2.6% year-on-year, which has been lower than expected. Seasonality, lower usage-based revenue and slower deal conversion affected growth. Some of our businesses like media and mobility have been affected by COVID. These businesses have started to recover, but the traffic is still lower than pre-COVID levels. Current quarter growth was low due to multiple reasons and is no way reflective of our long-term business outlook. As we win new deals and execute them, we expect the situation to improve in the coming quarters.Free cash flow generation trend has been robust, and consequently, our net debt has come down to INR 7,972 crores, a reduction of about INR 659 crores over Q2. Net debt-to-EBITDA is now at 1.9x compared to 2.9x a year back. Oasis investment that we did during the quarter is part of our annual cash flow forecast. Weighted average cost of debt for Q3 was at 2.88%.CapEx for the quarter was at INR 339 crores as compared to INR 490 crores in the same quarter last year. Our CapEx spend is within the range of the CapEx outlook that we gave at the start of the year. Trailing 12 months ROCE significantly improved to 21.1% as compared to 10.1% in the same quarter last year. In conclusion, data business continues to drive our overall business growth, along with improving operational efficiencies. The company's financial performance has been very healthy, and profitability and cash flow generation are constantly improving with every passing quarter. We are optimistic about the opportunities ahead, and we have the right structure in place to capitalize on these opportunities.This brings us to the end of our management commentary. I will now ask Vipul to open the forum for any Q&A. Thank you very much.

[Vipul Garg, Head of Investor Relations]

Thank you, Kabir. [Operator Instructions] The first question is from the line of Sanjesh Jain of ICICI Securities.

[Sanjesh Jain, Research Analyst]

A couple of questions on my side. Though some of things, Lakshmi, you tried to explain, but still. The expectation for the revenue growth was to accelerate with easing of lockdown and a strong sales funnel we have achieved in 1Q, which you mentioned that was highest in past 2 years. So I don't understand the slowing revenue growth. I'm talking purely Y-o-Y basis. I understand quarterly, there is a seasonality, but I think on a Y-o-Y basis, it would be a fair comparison. So what is the bottleneck? What we are seeing from a sales funnel translating into a revenue growth? That's one. I'll just ask the 3 questions. All the 3 are related, so you can comprehensively answer them.The second one is on the Growth Services, particularly, on the others part, which includes some of our marquee product where we have trusted hopes on our future growth, which is security services, IZO and cloud. That again, on a Y-o-Y basis, it's disappointing to see such a low growth on such a low base. If you compare the same with a cloud service provider or a software-as-a-service companies in U.S., they have been delivering high double-digit and triple-digit growth. And we are just starting here. I thought this is an exciting opportunity, and there's a huge addressable market for us. But revenue deceleration of that magnitude probably was not expected.That said, on an overall basis, if you can help us understand how the -- how it works from sales funnels to order book and the visibility on GDS revenue growth? So this is my comprehensive question on the revenue growth. It would be helpful if you can share some thoughts.

[Amur Swaminathan Lakshminarayanan, MD, CEO & Director]

Sure. Sanjesh, let me look at the revenue part first, right? We've been saying that there is a strong funnel, and I did mention that we had a highest funnel add as well. Now firstly, one of the things I would like to point out is our order booking year-on-year is growing, right? Our order booking has grown year-on-year.Now what has compensated in the translation of that into revenues are, one, is the loss of revenues in certain areas that I highlighted, right, in terms of -- in the mobility space due to the roaming and mobility space, the airlines and those revenues going away and softer -- in the collaboration space, there was a slowdown as a result of -- especially last quarter on the IUC charges related impact.Now all of this put together is what is causing you to see the year-on-year slowness in the revenue growth in some of these segments. But our order booking is definitely better. Our order booking has year-on-year grown. But some of this attrition in the revenues that I called out has net-net affected our growth in the revenues.Secondly, if you look at our order booking, our funnel, there are some larger deals. And I alluded, we are participating now in larger deals and more complex deals, which we would not have participated earlier, right? So we are participating on those deals.And frankly speaking, 1 or 2 deals in Europe and the U.S. geography, we came to a very close second, but we didn't make it. But there are huge learnings for us. And as a result of that, we are able to sharpen our IZO portfolio, our IZO WAN portfolio, right, now is available in a lot more markets in the international, and we believe that offer will become even more stronger.So I think the quality of what we are seeing in our pipeline and the nature of deals we are seeing in the pipeline is different from what we used to have. So that is one. And internally, there is a change that we are doing, as we said, working through with the sales and solutioning team. All of these are changing within the company, right?And I think while we might have lost a couple of deals, and there is slowness in conversion in some of these large deals, I feel very confident that our offering is getting only sharper and our capability to win deals in future is improving. And our ability to address a much larger segment, and therefore, able to convert these in future is only improving.So that's the color on the pipeline and some of the one-off impacts that we have had on the revenue, which has caused a slowness. That's the combination of these 2 that has affected.

[Sanjesh Jain, Research Analyst]

That's great. That's great. That's very helpful, Lakshmi. Just 1 follow-up question on the funnel and some of the deals which we just missed. What led to this miss? I mean was it our -- it was a superior offering of the competition or a more aggressive pricing or we lagged the reach? What do you think in your sense was made us to come second, else we would have been number one?

[Amur Swaminathan Lakshminarayanan, MD, CEO & Director]

So if I could give you an example. So some of -- probably in our largest network transformation in the past would have involved, obviously, multi-region, multi-country, but about 600, 700 sites. One of the deals we were working was involving 10x more than that. And I think we put up a very, very credible show there in coming second. The incumbent won that, and the reasons might be more of a comfortable incumbent.And secondly, in the international market, the nature of the deals are shifting to a lot more of Internet, which is also what I alluded to in my commentary and which I spoke about in our strategy, right, previously from private MPLS network, it is going to shift to the Internet, and -- we believe. And there, we are not encumbered by not having our own capability and network in the international market, but we do have the international pipes and the connectivity.In region, we are able to work with multiple providers and stitch together our IZO WAN proposition. And that IZO WAN proposition is getting sharper now, right? It's getting sharper, and we are introducing multiple variants. As a result of us participating in these deals, we are able to sharpen our proposition a lot more.The third is we introduced our service app only a year ago. While we had some early successes, we are going through the learning of how do we position this effectively with customers as opposed to offer simply a wired service, right, of connectivity.So all of these are major changes within the company, and we should not sort of overlook these transformations that we are doing within our company and at the same time, the changes that are happening in the market, but all I can say is we are participating and we are sharpening these. And it only gives us the confidence that we will be able to participate. And the white space is much bigger in this space.

[Sanjesh Jain, Research Analyst]

Just 1 follow-on question, a last question from my side on this. Does having lower on-net in U.S. and Europe geography, particularly on the terrestrial fiber, do you think that could be a big bottleneck for us in winning a large deal, whereas the incumbent or probably a local player will have a larger presence and hence, larger on-net traffic? Can that be a bigger challenge for us in terms of selling a lot of these or winning a lot of these large projects?

[Amur Swaminathan Lakshminarayanan, MD, CEO & Director]

Yes. I mean that used to be the case. But as the customers are moving to Internet, I don't think that would become a big bottleneck for us. And that is the opportunity that we have.

[Sanjesh Jain, Research Analyst]

Okay. So that is what is happening for us. So more Internet means much faster expanding addressable market for us. Is that the right way to look at it?

[Amur Swaminathan Lakshminarayanan, MD, CEO & Director]

I would think so. I mean it's not going to be easy. As you know, we are a challenger position in these markets, but the opportunity is available, and as we sharpen our IZO proposition, and we are also sharpening the security overlay on top of this IZO proposition, it will put us in a stronger position to participate in such deals much more solidly.

[Sanjesh Jain, Research Analyst]

Great. One more question on a different line, though. TCTS, again, we talked about turnaround in '21. That looks like it's getting pushed out. What's happening on the TCTCS (sic) [ TCTS ]? That's 1 question.

[Amur Swaminathan Lakshminarayanan, MD, CEO & Director]

Yes. So I think that...

[Sanjesh Jain, Research Analyst]

And a question to Kabir.

[Amur Swaminathan Lakshminarayanan, MD, CEO & Director]

Sorry?

[Sanjesh Jain, Research Analyst]

Yes, yes, go ahead, Lakshmi. No, that's for Kabir, I will ask later.

[Amur Swaminathan Lakshminarayanan, MD, CEO & Director]

No. I think the TCTS is getting -- has got pushed out. I think we alluded to a couple of contracts which have caused us problems. And one of the contracts we had gotten out of -- the other 2 contracts are in execution, but partly one of the international contracts that we had partly due to COVID, we ourselves had difficulty in transitioning in terms of moving people out of international location back to India and so on. And secondly, the customers' volumes were also not as much as we had anticipated at the time of contracting. So these have led to the slowness of revenue, while some of the costs were committed for these contracts. We believe, again, in the medium to long term, I believe, this business has good potential and prospects. We have strong capabilities, but we need to give it some more time to turn this around.

[Sanjesh Jain, Research Analyst]

Got it. Got it. 2 bookkeeping questions, Kabir. One is on the INR 500 million cost saving. Because of COVID, the run rate was there for the last 2 quarters. This quarter, you said that it has slightly normalized. If you can just quantify that, what is the kind of benefit we had in this quarter? That's one.Number two, on the tax rate. I had this particular question even in the last quarter, and Pratibha said that we need to stick to 28% tax rate. But it looks like our tax rate are falling, which was logical. Even I then thought because we had a lot of accumulated losses, that should result in a much lower tax rate for us. So if you can just make us understand how to look at tax rate for next 2 years, that would be very helpful.

[Kabir Ahmed Shakir, Chief Financial Officer]

Yes. Thanks, Sanjesh. So let me look at the costs for the benefit that we had of INR 50 crores per quarter. We've been getting that even this quarter. This quarter, what we basically did was looked at line item wise and what are the costs that we need to take the lid off. We were in an uncertain situation. So a lot of costs on marketing and internal training, internal people costs, we had actually put a stop to. Some of them, which needs -- which we need a momentum -- right momentum for us to start in Q1, those are the costs that we've actually lifted the lid on, so that we can allow them to be spent as the economy opens up. But we are very, very watchful of that, that it is direct costs that are very clearly related to driving revenue growth. So that's where we are coming in from.Answering your question on effective tax rate. You're absolutely right. This is a mix of -- as our international business starts delivering more profit, you will just find that we end up using the accumulated losses there, and that ends up in our effective tax rate actually coming down, which is what you actually see in this quarter. We would still stick to that range of, I think, 20% to 25%, which we had mentioned earlier. So we would stick to that range as we try and see how the world is going to really, really come out of COVID. If you ask me with the wave 2 happening and what the spread is going to be across the world, we still have a plan A, Plan B, plan C. Yes. So I would stick with our normative level. If international operations profit does go up, then it is simple mathematics that you will see the benefit until we utilize the accumulated losses.

[Vipul Garg, Head of Investor Relations]

The next question is from the line of Naval Seth of Emkay Securities.

[Naval Seth, Research Analyst]

I have 2 questions. First, as [Technical Difficulty] stated that there are early signs of recovery which are visible. So now how far are we to full recovery in revenues, whether it is 4Q end or next quarter or H2 of next year? How far are we assuming whatever the current conditions of lockdown we are seeing in U.K. and Europe?

[Amur Swaminathan Lakshminarayanan, MD, CEO & Director]

Yes. So we can't obviously give guidance as you appreciate for Q4 and ahead from a revenue perspective. But my commentary was more about the business opportunities that we see with customers accelerating their digital transformation and our ability to participate in those transformation projects. And as I said, our...

[Naval Seth, Research Analyst]

I don't want actually guidance on this. But -- sorry to interrupt, but I don't want guidance, but my only question is that by when one should see recovery happening based on whatever signs you are seeing right now or green shoots you have picked up visibility [Technical Difficulty]?

[Amur Swaminathan Lakshminarayanan, MD, CEO & Director]

Recovery in the sense, our enterprise business has still grown even this YTD and year-on-year. And our data businesses YTD has grown this quarter-on-quarter, year-on-year [Technical Difficulty]. So I'm not sure what you mean by recovery. If it means that the company has seen a data growth in the past of 6%, 7% and for us to first to come to that level, I'm quite hopeful that it will happen in the next few quarters.

[Naval Seth, Research Analyst]

Okay. Second question is on CapEx. So CapEx spends are quite low if we look at first 9 months as compared to the annual guidance. So any thoughts there? Are you expecting that guidance to be lower? Or we still maintain that INR 1,700 crores, INR 1,800 crores or 200 -- $30 million of CapEx?

[Kabir Ahmed Shakir, Chief Financial Officer]

Yes, let me take that. We had taken a call as a management at the beginning of the year when COVID had unfolded that we didn't know how revenue would come up. So a lot of CapEx we had actually put a stop to. So you see the reflection of our CapEx numbers is the conservatism that was there with the uncertainty around. In Q4 -- traditionally, our Q4 is a slightly stronger quarter in terms of our CapEx spend. And that's what we expect to -- so it should bounce back up. And that's what we do. But we will continue to be watchful of how the situation unfolds.And we have a very rigorous and a tight discipline against the CapEx approval and spend. We will continue to maintain that, but you should be able to see for the next quarter, the CapEx levels inching up, and it should not be at the same level that it has been there in the past.

[Vipul Garg, Head of Investor Relations]

The next question is from the line of Vimal Gohil of Union Mutual Fund.

[Vimal Gohil, Research Analyst]

Sir, my first question was on your UCC portfolio. What portion of your UCC portfolio will be in SIP trunk? And what will be the rest of the portion, which is probably growing at this point in time? Just wanted to understand the magnitude of SIP, which has impacted us this time around.

[Amur Swaminathan Lakshminarayanan, MD, CEO & Director]

Have we given disaggregated information on the UCC with regards to trunking [Audio Gap]. So we don't have and we don't give a disaggregated information on the 3 segments that I called out, for SIP trunk, the platforms and the others. But SIP trunk is a fairly large part of the UCC portfolio now, right? So roughly about 2/3 it will have. And that is the commentary that I gave, and that's the segment that has got impacted due to the reasons that I talked about.

[Vimal Gohil, Research Analyst]

And sir, the outlook in this particular -- SIP trunk is -- what is the outlook there? I mean if incrementally, people are going to move towards more platforms, how will this impact our SIP trunk portfolio?

[Amur Swaminathan Lakshminarayanan, MD, CEO & Director]

No, the SIP trunk portfolio, the global studies and analysts have said that it's likely to grow anywhere between 7% to 11%. And the segment to whom we sell, we already offer SIP trunk, and we sell a large part of our segment -- our customer segment is the large cloud service providers, right, like the Ciscos and the Microsofts and the Zooms of the world. And the other segment is our enterprise segment. As this cloud play becomes more and more dominant, the SIP trunk sales to the cloud services providers will grow and accelerate. And we have a strong proposition for the enterprise segment as well. Our SIP trunk is hugely differentiated by our ability with our fraud management capability as well, which many people acknowledge that we have the most advanced fraud management capability, right? So that -- and I also talked about relooking this entire portfolio on how we should look at the platform. So we've built APIs, so that these can be directly integrated with applications. We are launching more intelligent monitoring tools. As people join on these collaboration platforms, many a times, it's difficult for people to know why something is not working. As I said, the most famous phrase was am I audible, and people can't see things, presentations don't come up, the things freeze.So when you're in large meetings in an enterprise setup, how can we offer an end-to-end service that will deliver a superior experience? And for that, we need more intelligent monitoring tools, which are the ones that we are working on and which is soon to get launched. So we are reimagining this portfolio, and we believe that we will have an attractive proposition to not only the cloud providers through our GSIP trunk as well as the fraud management capabilities, we will also have a strong proposition to the enterprise segment as well.

[Vimal Gohil, Research Analyst]

Just to be sure, the SIP trunk is the one which you called out, which allows you to connect to any platform through conference calls, through a phone number, right? This is the same?

[Amur Swaminathan Lakshminarayanan, MD, CEO & Director]

Correct. Yes. That's right.

[Vimal Gohil, Research Analyst]

Okay. Okay. Fair enough. And sir, another point is for Kabir. Kabir, what would -- out of our total cost mix currently because that has undergone a very, very significant change over the last 3 quarters, what would be the proportion of variable and fixed costs at this point in time for the 9 months? Or if you can also give me the number for Q3 as well?

[Kabir Ahmed Shakir, Chief Financial Officer]

Well, most of our -- the way in which we call gross revenue and net revenue, most of our product costs that are actually involved goes already between gross and net. So that is directly variable to the revenue that we actually get, and we try and, I would say, maximize our gross margins there. Thereafter, between net revenue and EBITDA, most of our expenses are largely fixed in nature. And as the pandemic grew, we had taken calls. One of the bigger calls even before COVID hit was we looked at our employee mix. And if you are a global organization and a digital organization, we could deliver those services being anywhere. And so therefore, we came to an optimal mix of the right level of people that we need in those geographies to those who can actually operate from other geographies. So that was, again, a fixed cost, which we tried and shaved and brought to an optimal level. Thereafter, I would say, a large element of our costs that sit there are indeed fixed costs.

[Vimal Gohil, Research Analyst]

Right. So basically, the difference -- what you said is the difference between the gross and the fixed cost would most probably be the network cost which are variable in nature? The rest everything else is fixed, including salaries and other OpEx. Would that be right?

[Kabir Ahmed Shakir, Chief Financial Officer]

That is correct.

[Vimal Gohil, Research Analyst]

Fair enough. Okay. Okay. Sir, just 1 more question. What -- just on Oasis. If you could just help us revise, what was our investment? And what is the kind of revenue and EBITDA this asset generates?

[Kabir Ahmed Shakir, Chief Financial Officer]

We have provided what investment we have made to the notes to accounts. So you'll be able to find the details already in there. Yes. So we've paid -- I think $4.5 million is what we have actually put in there into -- yes. So that's the money that we have actually paid.

[Vimal Gohil, Research Analyst]

$4.5 million, right?

[Kabir Ahmed Shakir, Chief Financial Officer]

Yes. We'll get to revenue and EBITDA. We don't want to disclose that for individual lines of businesses. We didn't acquire the business for the independent what it generates, but what the synergistic effect that it actually has on the MOVE portfolio in totality. So I would be doing disservice to Oasis to quote that in isolation.

[Vimal Gohil, Research Analyst]

Fair enough. Vipul, I just have 1 more question, if I may. Would that be okay?

[Vipul Garg, Head of Investor Relations]

Yes. Yes, please. Please go ahead.

[Vimal Gohil, Research Analyst]

Sir, so we also hear most of your -- most of the IT services companies, your sister concern, TCS, talk about this whole opportunity that they see in cloud. I just want to understand what is the difference when a TCS or an other IT service provider call -- gives cloud-based services? And how is Tata Communications providing these services? I just want to understand the difference over there. What are IT services players doing there? And what is Tata Communications doing there, in cloud?

[Amur Swaminathan Lakshminarayanan, MD, CEO & Director]

So I think let me tell what we do I think -- or what we don't do. We are not in the application space, and we don't build applications for cloud and others. Essentially, we offer the infrastructure and platform as a service.And our strength -- and this cloud offer is largely for India. Of course, we have extended the cloud offer for select customers in media and others in international. And we have colocation services in the international markets as well. But purely as a cloud offer, we are focused on India market.And there, our offering is helping our customers to choose the right cloud solution, to migrate their applications to the cloud, where we have a very strong IZO Private Cloud proposition. And I gave an example of how the HANA Grid, and we've actually had 2, 3 customers already migrating their SAP HANA workload to our IZO Private Cloud. We also -- and we deliver a multicloud. So we enable customers for the private cloud and the public cloud to coexist and through our IZO command, we offer a single pane of glass to manage this infrastructure. That's the service and we bundle this with security as well as security is a very strong requirement as we move to cloud.

[Vimal Gohil, Research Analyst]

So what would be that fundamental difference between infrastructure services provided by IT services and infrastructure -- cloud infrastructure services provided by TCOM?

[Amur Swaminathan Lakshminarayanan, MD, CEO & Director]

No. I think in the space of cloud, I would say, we very much offer the same thing. It's just that other players, I think, are more focused on international markets. And in the cloud, we are very focused on the Indian market.

[Operator]

The next question is from the line of Sandeep Kothari of East Lane Capital.

[Sandeep Kothari]

Lakshmi, 2 questions. One is today's newspaper talked about the OFS by the government. Once the government holding comes down or is gone, does it make a difference of how we operate the company or what our long-term aspirations are? Does it make any difference? Or there's no difference?

[Amur Swaminathan Lakshminarayanan, MD, CEO & Director]

No. In terms of how we operate, I don't think there's going to be any difference. They have been on the Board. They have been valuable shareholders for the company. So in terms of how we operate on a day-to-day basis, there is not going to be any difference.

[Sandeep Kothari]

Fair enough. And the second question is that is the SMB opportunity in India a big opportunity for TCOM? Do you see that as a large opportunity or it is really the large enterprises which will be our customer base?

[Amur Swaminathan Lakshminarayanan, MD, CEO & Director]

Yes. I think we are focused on large enterprise. But our go-to-market levers comprises of -- the definition of large and medium is a gray zone. So we have a target segment in India which is fairly large. And we believe that segment requires a unique way of addressing.And within the enterprise segment, we are -- internally, we have 2 ways of taking it to market. One is through our sales teams and direct touch, and another segment is through what we call as a digital model, where we have regional presence and largely sold through digital channels. But for a particular deal size and complexity and customer intricacy, we have regional owners who are in touch with those customers. And I think these 2 segments have slightly different characteristics, and that's the reason why we are servicing them in this mode. But all of these segments have huge potential for growth in all of the products and services we have.

[Vipul Garg, Head of Investor Relations]

As we are almost approaching the time, we'll take the last question from Dipan Mehta of Elixir Securities.

[Dipan Anil Mehta, Chairman of the Board]

Sir, you spoke about a lot of costs going up and going down. But whatever the cost structure is as of the December quarter, is that now a fairly steady-state cost structure and you would just have marginal increases based on inflation going ahead? Or should we be budgeting for further increases in cost structure in Q4 and beyond?

[Kabir Ahmed Shakir, Chief Financial Officer]

Yes. I would say in terms of our manpower costs, I think we've come to a right optimal structure. But there are other business-related expenses, which I alluded to in my call earlier, marketing and stuff like that, where we had actually curtailed them due to the uncertainty, and we will release those costs back in. So you should expect that we will get to normative levels soon.

[Dipan Anil Mehta, Chairman of the Board]

So you'll have the costs which were similar to, say, fourth quarter of last fiscal, somewhere thereabout there, minus whatever costs, say, INR 100 crores, which you have already incurred?

[Kabir Ahmed Shakir, Chief Financial Officer]

I don't want to get into details and specifics of that. You're probably -- that's the ballpark, and you will -- I don't want to give specific numbers on that. But we will -- you can -- to answer your earlier question, it won't be at December quarter levels.

[Dipan Anil Mehta, Chairman of the Board]

And my second question is on the competitive intensity. Considering that there is a lot more business available, how would you compare the competitive intensity now post pandemic as compared to what was there before this particular lockdown and coronavirus?

[Amur Swaminathan Lakshminarayanan, MD, CEO & Director]

So from a competition standpoint, we have a wide range of competition. Again, within India, the network services, our competition is decent within our cloud and security and CDN. There are different competitors there. I wouldn't say the competition intensity has anyway changed as a result of COVID. There's just an ongoing competitive environment. And I wouldn't attribute to anything as post-COVID competition intensity has changed.Similarly on the international market, the same goes. What has changed in the international market, and I believe which will change in India as well, is the customers' acceptance to move to Internet a lot more than before because people are working from home, people are using Internet, and people are seeing that they can and -- but then it is not rapid enough, robust enough, secure enough.And -- but then if we are able to provide all of that on the Internet with SLAs, with security, we believe that people will look at that. So that changes will happen. And that will bring perhaps different sets of competition and new ways of doing things. But I wouldn't attribute the post COVID as any -- and related to any competition intensity.

[Vipul Garg, Head of Investor Relations]

This brings us to the end of this earnings call. I would now request Lakshmi for his closing remarks.

[Amur Swaminathan Lakshminarayanan, MD, CEO & Director]

Thank you all for joining us today. While we have delivered a good set of results in terms of profits and margins this quarter, we have alluded to the reasons for the revenues and the impact that was there. But we are very confident about the revenue growth, the transformation that we are doing internally to manifest themselves in the customer conversations and our ability to participate in those deals and convert them in the near future. Thank you.

[Vipul Garg, Head of Investor Relations]

Thank you, everyone. You may please disconnect the call.