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Muted volume growth; Mix change led realization growth and earnings beat

Route Mobile reported better-than-expected operating performance in Q3. Revenue grew by 16.5% QoQ/75.2% YoY to Rs9.9bn (organic 34%) due to change in business mix driving realization, benefits accruing from firewall deal, uptick in ILD rates in India, and continued market share gains. Management is confident of achieving 70%+ revenue growth in FY23; but considering the seasonality, Q4 revenue is expected to be lower than that of Q3. Sequential growth in billable transactions was muted and stood at 27.4bn in Q3 vs. 27.2bn in Q2; growth was impacted by bulk of promotional spends and festivals-led volume uptick, largely captured in Q2, and reduction in non-critical volume of ILD messages due to price increases. Management remains watchful of global macro headwinds such as rising inflation, energy prices, potential slowdown, and geopolitical uncertainties; however, management suggested that the bulk of its revenue comes from traffic terminated in emerging markets and the impact in these markets remains limited so far. We have raised our EPS estimates by 0.8-5.8% for FY23E-25E, factoring in the Q3 performance beat. We remain positive on medium-term growth prospects of the CPaaS industry and Route; however, poor cash conversion and potential growth moderation would weigh on the valuation multiple in our view. We maintain our Hold rating with a TP of Rs1,340 at 23x Dec-24E EPS (earlier Rs1,500/26x).

Result summary: Route reported revenue growth of 75.2% YoY/16.5% QoQ to Rs9.9bn in Q3FY23, ~10% ahead of our estimates. Billable transactions were flat QoQ to 27.4bn in Q3FY23, which were impacted due to the Diwali festival-led volume uptick, largely captured in Q2, and reduction in non-critical volume of ILD messages due to price increases; however, medium-term trends remain healthy, driven by new client additions and market share gains. Gross profit margin expanded by ~10bps QoQ to 22.4%, 70bps above our expectations. Reported EBITDAM expanded by ~50bps QoQ to 12.6%, ~120bps above our expectations. Net profit grew by 12% QoQ to Rs824mn, beating our expectations due to better operating performance and lower ETR. Route continues to see strong momentum in the non-SMS business (up 19% QoQ/53% YoY to Rs425mn), as next-generation messaging channels (IPbased messaging, email, enterprise voice solutions, and unified communication solutions) continue to witness increased adoption by enterprises. Route’s deep customer engagement continues to drive high recurring revenue (88% in Q3). Management has guided for at least 70% (earlier 60%) revenue growth in FY23. What we liked: Strong operating performance and healthy FY23 guidance. What we did not like: Weak OCF conversion (~2% OCF/EBITDA in 9M) and muted sequential growth in the number of billable transactions (27.4bn vs. 27.2bn in Q2)

Earnings call KTAs: 1) Management is focused on integrating all the acquisitions smoothly and deriving synergies by leveraging cross-selling opportunities. 2) Masivian reported revenue of ~Rs0.6bn in Q3. Masivian is performing well, based on the investments done over the past three quarters, and management expects 20%+ growth in FY24. 3) Mr. Messaging reported revenue of Rs2bn in Q3. 4) OCF was weak for the quarter due to strategic business initiatives (two large firewall deals) and discharge of GST liability. Management expects cash conversion to remain over 50% of EBITDA. 5) Realization per transaction was Rs0.36 in Q3 vs. Rs0.31 in Q2, led by business mix change in favor of RoW and ILD price increase. 6) The board is scheduled to meet on January 26, 2023, to consider the interim dividend. 7) Route plans to realign the senior management as well as hire a few seasoned industry professionals to drive the next phase of growth and profitability. 8) Net cash as of Q3-end stood at Rs7.5bn. 9) Management expects Q4 revenue to be a little muted compared to Q3.

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