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Route reported a mixed Q2 performance. Revenue grew by 4.9% QoQ to Rs10.1bn, short of our estimate of Rs10.4bn. EBITDAM of 12.6% was in-line with our estimates. Billable transactions grew 6.1% QoQ to 31.3bn in a seasonally weak quarter, aided by double-digit volume growth in the domestic market. The recent partnership with Vi is likely to garner USD100mn in annual revenue and mgmt. expects it to start gradually ramping up from Dec-23. Mgmt. indicated that transaction with Proximus is on track and expects to close the deal by FY24-end. Route will be a beneficiary from Telesign's traffic termination in India and other emerging markets, bulk of which are likely to flow once the deal is closed. Mgmt. remains confident of achieving closer to the upper end of 20-25% revenue growth guidance in FY24 due to H2 seasonality and planned ramp-up in deals with a leading e-commerce company and Vi. We tweak our FY24-26E EPS marginally, factoring in the Q2 performance. We maintain HOLD with an unchanged TP of Rs1,720 at 22x its Sep-25E EPS.

Results Summary

Revenue grew by 4.9% QoQ/20% YoY to Rs10.1bn, lower than our estimate of Rs10.4bn. The number of billable transactions increased to 31.3bn in Q2FY24 from 29.5bn in Q1FY24, while average realization fell to 32.4paise from 32.8paise in Q1 largely due to an increase in the domestic business. New product revenue jumped 53% QoQ to Rs589mn. Gross margin fell 20bps QoQ to 21.2%, below our estimate of 21.8%. EBITDA margin of 12.6% was in line with our estimate. Net revenue retention for the quarter was 115%, with recurring revenue of 89% for H1FY24. Top-50 client concentration for H1FY24 declined marginally to 77%, from 78% in FY23. Reported OCF was negative in H1FY24; however, adjusted for security deposits of ~Rs3bn for two service providers, adjusted OCF/EBITDA was ~77% in H1. Route has declared an interim dividend of Rs3/share. What we liked: Sharp growth in new product revenue and growth in billable transactions. What we did not like: Revenue and gross margin miss.

Earnings Call KTAs

1) Mgmt. is confident about the FY25 revenue growth trajectory on account of full-year benefit from the recent large deal signings and synergy benefits accruing from the Proximus deal. Mgmt. has retained its USD1bn revenue guidance in 3 years. 2) The company expects USD100mn revenue from the Vi deal, with contribution likely to commence from Dec-23. 3) Mgmt. has reaffirmed estimated synergies of USD100mn to accrue from a) leveraging Telesign’s digital identity platform in emerging markets, b) driving economies of scale by consolidating cloud infra, software licenses and vendors, c) making inroads into untapped large global accounts through Telesign to service its requirements in EM, and d) direct cost synergies, which will drive better efficiencies owing to higher economies of scale and deepen and expand the exclusive MNO connects. These initiatives will accelerate Route’s journey towards USD1bn revenue, with 15% EBITDA margin target. 4) Telesign and Route were working together before their deal as well, and while throughput has increased, the lion’s share of synergies should start flowing post-closing the deal. 5) An integration governance committee has been set up, with senior leaders from Proximus, Route, and Telesign to ensure the smooth completion of the deal. Mgmt. expects the deal to be consummated by Q4FY24. 6) Employee benefit expenses decreased QoQ, primarily due to the roll-back of performance-based stock options and cancellation of ESOPs owing to the resignation by few employees. 7) DSO increased to 73 days in H1 due to delay in payment from a large OTT client. Mgmt. expects it to return back to the normal level of 60-65 days.

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