Tata Comm AI Cloud with Nvidia to launch this year; investment to continue says CEO

Edited excepts:

While revenue has gone up, profit and margin have declined. Can we expect improvement this year?

We have achieved financial fitness and now have the balance sheet strength and cash to invest. I've been telling the market we cannot grow without making investments, so we are in investment mode.

We invested in building our capabilities and our portfolio, which comprises the entire digital fabric, including the network fabric, the cloud edge and security fabric, the interaction fabric, and the IoT fabric, which now resonates with enterprise customers. To strengthen each of these, we had to organically invest in hiring people to build these platforms. We also did inorganic investments in acquisitions such as The Switch and Kaleyra. We have said these companies are not profitable and will pull the margins down.

We are continuing to invest in new products in the company, so we are in investment mode to deliver growth. That is what you will see this year: even though the macro conditions have been tough in the international markets, we have been able to deliver growth numbers.

On the margin side, we explain the reason for the margin. So, these reasons are the revenue mix. Each portfolio comes with a very different margin preference, that is one reason, and investments in the market with sales, product and inorganic investments, and combining the non-profitable acquisitions that, when integrated, pull the margins down. Additionally, some of our subsidiaries also were dragging their margins. So, these were the significant reasons that we said that are the reasons why you see a dip in the margin numbers, therefore, the absolute EBITDA number also is marginally lesser.

These are all part of the design, and because we are in investment mode, we have a clear path for each product to become profitable.

For example, acquisition of The Switch, combined with our media business, will turn profitable this year. And Kaleyra, when combined with our interaction business and the customer interaction suite, from negative margins, we will make profits this year. We said we would take it to double-digit numbers in the medium term, maybe in another year or two. We have a clear path to getting to a profitable position. We are in an investment mode; you have to invest to deliver the growth, and we will work on the profitability as we go forward.

Are there new areas for investment?

First of all, we need to strengthen all our portfolios. We are investing in the network fabric to make our entire network more intelligent and intent-based and launched a cloud networking product. We will further invest in strengthening that cloud networking because everybody's moving to the cloud. Cloud networking is a different beast altogether.

So we are investing in that product to help our customers use the cloud and get all its benefits in the most cost-effective manner.

We've invested in interaction fabric, Kaleyra. There, we will make two types of investments. One is focused on integrating and driving the synergies because they will have multiple engineering teams. We have multiple engineering teams and locations of products and platforms hosted across the world, and we will be synergizing all of that. And that requires some investment before we see the synergy benefits coming through.

We are also investing in the Kaleyra platform to build the software layers above the channels to make them more intelligent and contextual. In our Cloud and Edge, we are going to launch our Edge product very soon for enterprises, including media businesses. We are investing in that. We talked about launching our AI cloud with Nvidia, which will require investments.

There are many potential opportunities, and we have investments in all four fabric areas. That will help us drive growth. This year, we have taken a mission to improve our margins as well since we cannot say that we are continuously in investment mode. So, we will be investing and looking to see how to enhance the margin simultaneously.

When are you going to launch the AI Cloud in partnership with Nvidia?

We are also going to be launching our own AI Cloud in partnership with Nvidia. Sometime this year, we should be able to launch it. The launch is dependent on several factors. It's not just a question of buying the GPU, we need to get the architecture right, we need to get the data centers ready for it. We need to do all the engineering work to ensure it will work. Secondly, we are also building the platform layer on the infrastructure layer.

Regarding regions, is the US market on track to become a billion-dollar business?

We talked about the US as a billion-dollar ambition. It is too early to say whether we are on track with that or not, as we are building out the teams. Our presence is in terms of infrastructure and footprint. We have a very good footprint with The Switch and our own fabric. We just won a large deal a few weeks ago with a US customer to enable them to transform their network.

We are in a challenger position in the US, so we have to get our name out. Many customers don't know that we exist. So we are a well-kept secret as far as they are concerned. So we have to get our name out there and push on sales and marketing a lot more.

But the potential for us is immense. So that is why we were very gung ho about setting ambitious goals for ourselves.

The same applies to the UK, European, and APAC markets, as they are all very big markets. We are winning deals against solid incumbents there, but we can do more. So that is what gives us the confidence that we can go after these markets in a structured way. But that is also going to require investments to build relationships. It's a long grind, but we are very bullish.

Are you still looking to fill gaps through the M&A route?

I wouldn't call it gaps. It is rather about enhancing capabilities. The number one focus is to integrate and deliver whatever is acquired. But simultaneously, we have a team that constantly scouts for opportunities. We might get a knock on the door and say, are you interested in this? So we are open to it. But I wouldn't put that a priority to be done. If the right opportunity comes along, we will do it. It's a more strategic fit with what we want to achieve. And if the right opportunity comes along, we will do it.

Which are the regions expected to perform well in FY24?

This year, the UK has done very well, and APAC is beginning to do very well. From the FY 24 perspective, they have all done good double-digit growth. Europe is also looking at double-digit growth. The market we need to really ramp up pace is the US market since it is a large market, and we are just beginning the journey. All these international markets have large potential.

With teams and presence, we can effectively address those markets. We will continue working with partners to address the enterprise segment.

Is there any opportunity emerging from the data localization mandate in India?

Basically, in India, there's a lot of data localization requirements have come up, so we are looking for our cloud and helping with our cloud storage and cloud archival. We expect our cloud itself to grow in India. In the international markets, we don't have a Cloud offer. But you know, when you talk about localization and everything else, people must connect to different data centres in different clouds. So, hopefully, that will translate to more opportunities for us from a network fabric point of view.

Is there any impact on business because of the tensions in the Middle East?

Not directly. International customers have been cautious for some time for various reasons, including the macroeconomy. The UK and Europe have been talking about the recession. The US, which was doing well, was still cautious because inflation is not tamed there as yet, and we don't know whether rate cuts are going to happen or not. So, the customers are cautious.

The fact that this Middle East flare-up is happening is just one more reason for them to remain cautious. I don't think that will have a special impact. I would, I would, I would think they have been cautious, and we've been seeing that in an avid commenting on it in our own way in terms of our funnels. They're there, but they're not converting fast enough, is what we said.

And we saw that in everybody else's results as well. So I think that will continue for some time. But as far as Tata Communications is concerned, our presence is small and our market share is small, we have still been able to grow our international business by double digit because we are, we are a challenge and position there and we are helping our customers to become a future readiness in this challenging environment.

In January, Tata Communications terminated its managed services contract with Vodafone Idea due to a pending dues issue. Now, with their FPO and capex plan, will Tata Communications consider resuming work?

Once it's broken, you can't immediately fix it. So, we must give it time to see what it is. Some of these decisions are not easily reversible. The short answer is no. The subsidiary that was working with them largely focused on the international markets besides working with some Indian telcos.

Is there any update on the private 5G opportunity?

We built our capability to help enterprises implement and run private networks. We don't have the spectrum ourselves, and we will work with other telcos to bring that capability. But we will set up the private network for the enterprise from the ground up. We will integrate them, we can orchestrate across all of the multiple technologies of access, whether it's a low power LAN or Wi-Fi six on private network, you will be able to orchestrate that and help our customers to deliver the use cases. That's the capability we are taking to the market.

But clearly, on the spectrum side, we will work with other players to enable that. Whenever the government allows enterprises to acquire spectrum directly, our ability to serve the enterprises will be that much better.

How big is the focus on adopting AI and GenAI?

We are doing several projects to improve our own processes and become more efficient using AI and GenAI.

The second side of the equation is we're looking at how we can embed GenAI and use the opportunity to monetize the demand in the market. So for example, in the customer interaction play, we will be working on Gen AI and AI capabilities to make those interactions more intelligent and more contextual. In the growth of our network and the cloud security fabric, we are already using AI/ML to detect and mitigate security vulnerabilities. We are using our AI capabilities for in the voice business. There is a lot of fraud happening, and suddenly, enterprises would see a bill, and they would be shocked to see their bill has gone up so much because some spoof guy has used the numbers to make calls and then calls and then the spend suddenly will go up. We have fraud prevention as an entirely AI-driven service to prevent that from happening. It's a great use case from which customers can benefit.

Will there be an upside in revenue from adopting AI and GenAI?

AI is bringing extra capability when delivering collaboration, service, and fraud prevention. That will help us sell and accelerate, similar to our security. We will get better at it, and as a result, we can sell more.