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Weak topline growth; focus shifts to synergies realization

Route Mobile reported muted operating performance – revenue declined 0.7% QoQ, missing our estimate. Route posted revenue growth of 12.7% for FY24, missing its guidance of 15-17% (revised downward in Q3 from earlier 20-25%), raising concerns on growth predictability. Growth has been impacted by industry headwinds since Nov-23, weakness in MR Messaging, seasonality of Masivian, and devaluation of the Nigerian Naira. Realization was also hit, by business mix change with higher share of domestic volume. EBITDAM of 12.3% was in line with our estimate. New product revenue growth remained muted in Q4 and progress thus far remains slow. Management refrained from providing FY25 guidance, pending closure of the transaction with Proximus, and will offer more details, including synergy benefits, later. Growth in FY25 should be aided by ramp up of large deals, coupled with synergy benefits. We cut FY25E/26E EPS by ~3.3%, factoring in the Q4 miss and near-term industry headwinds. We retain ADD with trimmed TP of Rs1,700/sh at 22x Mar-26E EPS.

Results Summary

Revenue declined 0.7% QoQ to Rs10.17bn, standing below our estimate of Rs10.5bn. Number of billable transactions grew to 34bn in Q4 from 31.2bn in Q3, and realizations declined to 29.9paise from 32.8paise in Q3. New product revenue declined 4.5% QoQ to Rs643mn, partly due to seasonality in Masivian. Gross margin expanded by 60bps to 21.8%, whereas EBITDAM expanded by 10bps QoQ to 12.3%, both coming in line with our estimate. Adjusted profit was Rs863mn, matching our expectations, and aided by higher other income and lower tax. Net revenue retention stood at 106% for FY24, with recurring revenue at 92%. The top-50 client concentration came down, from 78% in FY23 to 75% in FY24. The company has declared a final dividend of Rs2 per share (total dividend of Rs11 for FY24). What we liked: Margin resilience. What we did not like: Revenue miss, slow progress on new product revenue, negative reported operating cash flow (normalized OCF/ EBITDA of 56% in FY24 vs 45% in FY23).

Earnings Call KTAs

i) The CPaaS industry is witnessing some headwinds since Nov-2023 w.r.t. enterprise cost optimization initiatives, particularly from global OTTs and shifts in communication channels. Management remains vigilant of these changes and has aligned its strategic roadmap to leverage the emerging opportunities. It has secured strategic deals and laid the groundwork for a stronger FY25. ii) Management highlighted that the Proximus deal is on track, and final holding and deal closure is expected in May-24. The company will require shareholder approval for related-party transaction limit, to derive planned synergy benefits. The company is likely to provide FY25 outlook following the approval. iii) Masivian revenue declined 17% QoQ, largely due to seasonality in the business. iv) MRM's revenue declined 17% QoQ to Rs1.79bn, due to geopolitical uncertainties and one client undergoing consolidation. v) DSO increased to 80 days at the end of FY24 vs 62 days YoY. Management indicated that it received payments from some large OTT players in the first week of April. vi) India ILD volumes witnessed single-digit growth, but the decline was more prominent in RoW. Clients were cautious about spends which led to relatively lower than expected growth. Management expects ILD volumes to see growth in coming quarters. vii) Management expects material improvement in cash generation in FY25, as funding for security deposits reduces. viii) Devaluation of the Nigerian Naira (NGN) impacted revenue by Rs110mn and Rs260mn for Q4FY24 and FY24, respectively

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