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Route Mobile posted a weak operating performance in Q1, although adjusted for one-offs, performance was broadly inline. Revenue grew 8.5% QoQ, in line with our estimate, aided by the Vi deal and incremental throughput from Telesign. Billable transactions jumped up 9.1% QoQ on the back of volume growth in the domestic market, whereas average realization was broadly stable QoQ at ~30paise. Reported EBITDAM fell by 110bps QoQ to 11.2%, missing expectations, although adj. EBITDAM was broadly in-line with expectations. Given the Q1 performance, ramp-up of the Vi firewall and expected synergy benefits (based on current run-rate on RPT transactions), the management expects revenue to grow 18-22% YoY in FY25, along with 13% non-GAAP EBITDAM and 50-75% cash generation (OCF/EBITDA). The management continues to aspire for US$1bn revenue in the next 2-3 years. We cut FY25E EPS by ~4%, factoring in the Q1 performance and FY25 guidance, and largely retain FY26E/27E EPS. We retain ADD with a TP of Rs1,800 at 22x Jun-26E EPS.

Results summary

Revenue grew 8.5% QoQ to Rs11.03bn, in line with our estimate of Rs11.06bn. the number of billable transactions grew to 37.1bn in Q1 from 34bn in Q4, and realizations were broadly stable QoQ at ~30paise. New product revenue grew 15.9% QoQ to Rs745mn in Q1FY25. Gross margin declined by 10bps to 21.7%. EBITDAM declined by 110bps QoQ to 11.2%, missing our estimate mainly due to one-offs like forex loss (Rs119mn) and one-time cost incurred for seeking expert opinions on transfer pricing for related-party transactions with Proximus and for the mandatory tender offer (Rs8.6mn). Adj. EBITDAM was broadly in line with expectations. Reported profit was Rs785mn, missing our expectations due to higher ETR and margin miss. Net revenue retention stood at 105% for Q1, with recurring revenue at 91%. The company added 2 new clients in the +USD15mn bucket, taking the total clients in the category to 7. What we liked: New products performance, growth in billable transactions. What we did not like: Margin miss, weak cash conversion on reported basis.

Earnings call KTAs

i) The management expects synergy benefits from the Proximus deal to start playing out gradually. FY25 guidance builds in the current RPT run-rate, and any improvement may drive an upside. Cost of sales benefit will have an immediate impact, while cross-charging on shared services would be seen from Q3. Cross-selling of new products is likely to take some time. ii) The recently-announced 5-year deal with Microsoft is an example of synergy benefits, and the management indicated it is pursuing a few more such deals. iii) The management highlighted YoY growth in ILD volumes supported by the Vi deal, although certain brands have lowered their volumes due to high pricing and are exploring alternate channels. The management seems convinced about achieving some growth in ILD volumes on the back of firewall installation at BSNL and Vi. iv) Employee cost sharply increased 27% QoQ on account of increments, one-off incentives given to retain talent, and reward for exhaustive integration work. This quarter on, it started expensed-out investments in digital identity project Trusense, amounting to Rs14.5mn (earlier, it used to capitalize this). It expects monthly employee costs of Rs200-210mn to be sustainable. v) Gross profit was impacted by non-cash impact of Rs38.8mn related to amortization of refundable security deposit provided to MNO. vi) The management plans to augment its product portfolio with acquisitions in a few cutting-edge futuristic technologies. The company plans maintaining the dividend payout ratio at up to 20% of PAT.

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