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Route Mobile reported a better-than-expected operating-performance in Q4, even in a seasonally-weak quarter. Revenue grew 2.3% QoQ/61.1% YoY, on growth in banking clients (recently on-boarded). While the number of billable transactions was slightly lower vs Q3, uptick in average realization led the growth in Q4. Gross margin for Q4 was impacted by seasonality in Masivian as well as by geopolitical issues in MR Messaging. Management indicated that telcos have taken ~25% price hikes for ILD messages in Q1 which would support the growth momentum. The company has guided for at least 20% revenue growth, with EBITDAM of 12.5-13% for FY24. We raise FY24E/25E EPS by 12%/9%, factoring-in the Q4 beat, ILD price hike, and margin outlook. Poor cash conversion and slower scaling of non-SMS products remain concerns and will keep valuation under check. We maintain HOLD, with revised TP of Rs1,500/sh (earlier Rs1,380) on 23x Mar-25E EPS.

Results Summary: Revenue increased 2.3% QoQ/61.1% YoY to Rs10.1bn, ahead of our estimates of Rs9.5bn. Number of billable transactions marginally declined, from 27.4bn in Q3 to 27.4bn in Q4, due to seasonality. Average realization for billable transactions improved, from 36paise in Q3FY23 to 37paise in Q4FY23. For FY23, revenue grew 78% YoY to Rs35.7bn (organic 41%), well above the company’s guidance of at least 70% revenue growth. New-product revenue declined 13% QoQ to Rs368mn in Q4. Gross margin declined ~110bps QoQ to 21.3%, coming in 70bps lower than our estimated 22%. EBITDAM expanded 50bps QoQ to 13.1%, ahead of our estimates. Net profit grew 23% QoQ to Rs1bn. Cash conversion remains weak in FY23 (reported OCF/EBITDA at ~16%; normalized OCF/EBITDA at ~45%). Net revenue retention stood at 124% for FY23, with recurring revenue at 87%. The top-50 client concentration reduced, from 80% in FY22 to 78% in FY23. The company has announced a final dividend of Rs2 per share. What we liked: Strong revenue growth and margin beat. What we did not like: Weak OCF/EBITDA; sequential decline in new products revenue.

Earnings-call KTAs: 1) Route delivered a normalized OCF/EBITDA conversion of 45% in FY23; Management expects this at 50-75% in FY24. Enterprise business growth is expected to have some impact on OCF. The company’s receivable and payable cycles have now stabilized, which should lead to better cash conversion. 2) The company onboarded banking clients in India, Ghana and Nigeria which would drive volume growth in coming quarters. India, GCC, Latin America and the Indian subcontinent markets remain the focus areas for the company. 3) The company is currently focusing on integrating past acquisitions and deriving synergies. M&A remains an integral part of its growth strategy. Virtual contact-center capabilities and expansion into the US market remain focus areas for M&A. 4) The firewall deal in Sri Lanka will go live from May 21, 2023. The company expects to close firewall-related deals with 6-8 operators in FY24. 5) The company expects EBITDA margin at 12.5-13%. Further, Route plans separate SBUs for TruSense as well as for voice and virtual contact centers, further to which it has onboarded senior management personnel (experienced resources). 6) ILD price hike took place in Apr-23. The company expects some dip in volume, as seen in the past; however, net benefit will start flowing-in from Q1FY24. 7) MRM and Masivian reported revenue of Rs1.47bn and Rs0.5bn, respectively, in Q4

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