RateGain Travel Technologies Limited (RATEGAIN) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 and 9 Months FY '23 Earnings Conference of RateGain Travel Technologies Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Bhanu Chopra, Chairman and Managing Director. Thank you, over to you, Sir.

Thank you. A very good afternoon to everyone, and thank you very much for joining the earnings call for RateGain Travel Technologies Limited for the third quarter and 9 months ending December 31, 2022. We're excited to connect with all of you again and share some key highlights from the quarter gone by. Joining me on the call are Mr. Tanmaya Das, our CFO; Mr. Divik Anand, our Head for Investor Relations and Thomas P. Joshua, Company Secretary of RateGain. And alongside, we have our Investor Relations partner, Strategic Group Advisers. We announced our third quarter results for the financial year 2023 earlier today. And also briefly, I hope you've had a chance to go through our financial results press release and investor presentation that are available on the stock exchanges and on our company website. We're delighted to share with you another quarter of healthy and resilient performance with broad-based growth across all 3 business segments, strong margin performance and steady travel demand across key geographies. This was the best ever quarter in the history of RateGain in terms of new contract wins, and we continue to deepen on our presence across our enterprise clients. RateGain being a trusted and reliable partner of choice for many large OTAs and hotel chains has been instrumental in driving new business, and we continue to engage with our customers, driving the healthy pipeline of INR 268 crores. We continue to report strong performance on the margin front with an operating margin of 17.6% on the back of operating leverage and favorable business mix contributing to the margin performance. Our business lines DaaS distribution, which are also our high-margin businesses, continue to witness good traction with good volume growth with existing clients and continued monetization of new logos added in the past quarters. continue to focus on responsible growth and monetization of new products introduced in the last 12 to 18 months. We are well on the path to seeing expansion in margins on the back of operating leverage kicking in, which I've highlighted many times recently, is really the beauty of the SaaS business model. On a run rate basis, our annual recurring revenue exceeds our pre-COVID ARR by 27%. RateGain is also performing very well on the Rule of 40 that I often talk about, which is a benchmark for SaaS businesses. We are currently at 57%, which is an aggregate of the 17% EBITDA plus 40% growth. As you all very well know, we completed the acquisition of Adara in second week of January. We are extremely excited about the opportunity, given the inherent strength and value of the technology and platform we've acquired and how this travel intent data can really drive higher return across digital marketing campaigns for travel and hospitality companies. This fits in perfectly with the vision of RateGain to build an integrated RevMax platform that allows our customers to do guest acquisition, guest engagement and retention and wallet share expansion. The initial integration plan is well underway, and the focus is to make this business EBITDA positive in the next couple of quarters and map out the GTM road map, first capturing the low-hanging fruit, which is to recapture and reactivate the existing one lost relationships. Global travel companies continues to hold steady despite the volatile macro scenario. But with the recent opening up of Asia geography, especially China, we expect to see good growth in the international travel market. The Global Travel Outlook Report released by Skift recently refers to travel as a mega trend with cross-border travel expected to grew at 50% and healthy revenue uptick for our customers, including hotels, airlines and vacation rentals. We continue to focus our sales and marketing efforts with the combined efforts of our team, we had the best ever quarter in the history of RateGain with new contract wins recorded at over INR 49.3 crores at 22% growth over Q3 of last year which was our biggest quarter then and really ever prior to this. We continue to make calibrated investments in growing in certain geographies and behind our growth products. As we continue to deliver and execute across key parameters, I would like to applaud RateGain team of delivering another strong quarter and moving towards our vision by becoming the leading SaaS-based RevMax platform in the travel and hospitality space. With that, I will briefly now touch on the performance across our 3 business segments, starting with Distribution segment. This division accounted for 38.9% of our total revenue with a recurring revenue of 99%. We witnessed healthy volumes growth in the past quarter with demand across OTA channels and midsized hotel chain segment. We continue to expand our footprint with our connectivity platform and the integration of Content AI with Booking.com is a step forward in seamless and efficient content distribution for hotel chains. RateGain continues to innovate in solving the challenges of our industry to help our customers unlock new revenue every day. Our Martech business continues to grow at a healthy case contributing to 34.4% of our total revenues with a 99% recurring revenue. We continue to make inroads into the APAC and Middle East region and have onboarded multiple properties with our innovative brand engagement and paid digital media solutions. Post the FIFA World Cup, hotels in the Middle East, especially are increasingly focused on social media presence and direct guest acquisition. Our end-to-end digital marketing offering covers all essential customer acquisition channels, including Google, Meta, social media, including Facebook, WhatsApp, TikTok, Snap, et cetera. And we are able to deliver higher return on ad spend of our clients with real-term demand and parity insights through our DaaS products. With our recent acquisition of Adara, we'd be able to draw on the travel intent audience to drive more targeted marketing campaigns and drive higher returns. The DaaS business unit grew at a strong pace on the back of increased volume demand and expansion with our existing enterprise customers. We're seeing increased demand from our OTA and hospitality customers in the Asia Pac geography with a revival in travel demand and our air segment continues to perform well with new logo additions. Recurring revenue for DaaS business at 98.1% and contributed to 26.7% of the revenue in the third quarter. Our M&A strategy continues to be one of the key product stores of our growth strategy here at RateGain, with the completion of the recent acquisition, the focus would be on the integration from shared services perspective and from sales GPM perspective to leverage the global presence of RateGain. On the people front, RateGain was certified as a Great Place To Work for the fourth year in a row. We have various programs for upskilling and building talent within the organization, namely RG POLO and RG Chrysalis. All these programs along with -- within promote people within to approach to encourage the team to perform at an optimum level are key to the performance that's reflected in our quarterly performance and to retaining talent. In terms of awards and recognition, we were awarded in 2 categories at the recently concluded 2023 HotelTechAwards organized by HotelTechReport, rate shopping and market intelligence, which is part of our DaaS business line and the channel manager, which is part of our Distribution business. In addition to this, RateGain continues to dominate every category it has products in rising #1 in social media, #1 in content management and #2 in rate parity. I'd like to now ask our CFO, Tanmaya Das, to take you through the performance of Q3.

Thank you, Bhanu. And a very warm welcome to everyone on the call. I'm proud to report that the company has posted another strong quarter with healthy revenue growth, margin expansion and new contract wins. The healthy pipeline and new contract wins despite a volatile global environment highlights the strength of the travel industry and the increasing need of digitization to drive revenue growth in this sector. In terms of headline numbers for Q3, which is historically a strong quarter for us as compared to Q1 and Q2. The company has registered a 40% year-over-year and 11% sequential revenue growth with Q3 FY '23 revenue at INR 138.3 crores. Worthwhile to note that all the growth this quarter are organic growth, our EBITDA stood at 16.58%, which saw a growth of 147% year-over-year and 30% sequential. Our adjusted EBITDA stood at 17.6%. While our revenue growth was 40% year-over-year. Our operating costs grew by 29%. Sequentially, while our revenue growth was 11%, our operating costs grew by 8%, resulting in operating leverage other EBITDA margins improved from 9.36% to 16.58% year-over-year, and from 14.11% to 16.58% sequentially. In terms of PAT, it grew INR 0.9 crores to INR 13.3 crores year-over-year which is multiple increase. Sequentially, it grew from INR 12.9 crores to INR 13.2 crores. Our other income reduced by INR 6 crores this quarter, primarily due to unrealized ForEx loss of INR 4.5 crores arising due to the restatement of our U.K. balance sheet where U.S. dollar cash and receivables were restricted were restated to British pounds and as U.S. dollar depreciated against British pound, resulting in notional accounting loss. Without this notional accounting loss the PAT would have been INR 17.7 crores for this quarter. In terms of headline numbers for 9 months ended, our revenue grew by 48%, DaaS grew by 29%, Distribution 35% and Martech 82%. EBITDA stood at 13.7% as against 5.9% for the corresponding period last year, which is a growth of 245%. PAT stood at 9.06% at INR 34.6 crores whereas last year same period, we had incurred loss of INR 1.5 crores. At the start of the year, we had given a guidance of 30% growth and 12.5% EBITDA margins, and we are well in course to beat the guidance with by a good margin. The company continues to have strong customer relationships that are helping and building scalable, predictable and sustainable revenue streams. Recurring revenues for the quarter stood at 98.3% and 77% of revenue were subscription in nature. Gross revenue retention and net revenue retention stood at 90.4% and 105%, respectively. The revenue per employee saw a 25% increase over last year at INR 0.86 crores. Our annual recurring revenue stands at INR 553.1 crores, which is 32% more than ARR as of the end of last year. Our pipeline continued strong and stood at INR 268 crores. We continue to have strong balance sheet where our net worth saw an increase of 4% as compared to last quarter and stood at INR 678.3 crores. Our cash and cash equivalent balance for -- at the end of quarter was INR 432.8 crores, but we have deployed around INR 120 crores post the quarter for recent Adara acquisition. Our cash from operations continued to see marked improvement in 9 months of this year and stood at INR 29 crores, which grew outgrowth of 68% as against same period last year. I'm also happy to report that Adara integration is progressing well the initial phase is on track with the integration of shared services, namely finance, HR and marketing is underway. We're pretty excited about the growth prospects and synergies that we need to capitalize on in the coming quarters and years. In terms of guidance for Q4, we will be able to consolidate Adara financials for this quarter for 2 months and 20 days as we completed the transaction around 10th of January. We expect to grow organically 30% year-over-year. Our organic business margins should expand to around 18% to 19% in Q4. For Adara, we expect to register a 5% EBITDA in this quarter. However, we have spent certain onetime costs to close the transactions in legal and professional expenses, which will take its effect. Considering all the above, we expect to deliver around 15% EBITDA for the quarter on a consolidated basis. We expect our PAT margin to be around 9% for the quarter and for the year without any dilution due to the acquisition. With that, I would like to conclude my update, and we are happy to open the floor for questions.

[Operator Instructions] This question is from the line of Karan Uppal from PhillipCapital.

So a couple of questions from my side. Firstly, on the overall travel outlook, so Bhanu, if you can elaborate amidst the macro challenges, What is the outlook on the overall travel for CY '23 and it will be helpful if you can break it up in terms of our core markets like U.S., Europe and APAC and how big is the opening up of China for the travel industry, if you can elaborate on these 2 lines.

Yes. So in terms of the overall outlook, as I mentioned, you -- we referred to Skift, which is a very well-known publication and basis the Global Travel Outlook Report that was released by them, they're referring to travel as a megatrend and a cross-order travel is continue to -- expect it to grow at 50%. And as you mentioned, specifically, what we saw in sort of rest of the world will play out in China as well because they only recently opened up their borders. So we do expect a lot of that pent-up demand to flow into the cross-border travel, international travel as well. In terms of the key markets for us, as you know, it's largely U.S. and Europe. And as far as the numbers that we reported and even in the existing quarter, the number of transactions and the volume and the conversation with customers is not giving us any reasons for concern. But at the same time, I am cautiously optimistic about what the industry holds for the rest of the year. Of course, there is a lot of chatter about in our key markets of U.S. and Europe about potential recession and interest rate raising. So like I said, we see travel as a megatrend, and it's defined currently everything, and we are hoping for the best and that it will continue to remain so. But like I said, I am cautiously optimistic. So I do believe that we should hold steady from here on.

So just to take this forward in terms of your cautiously optimistic commentary, do you still believe that 30% growth rate can be possible organically in FY '24?

So that's what basis -- see, the growth is really a function of really 3 things, right? So it is a function of the retention of the business. And as you can see, we continue to retain most of our business. We have healthy GRR rates. Our ability to grow existing customers is the second point, and you're seeing our net retention rates are getting better, although incrementally better. So also looking at the conversations we are having with our large customers and the chat about volume expansion that we are seeing with them that gives me the confidence that we will continue to expand on our NRR rates also. And thirdly, as we noted, we had the best ever quarter in this last quarter, Q3 in terms of new customer wins. So all the indications that we have in front of us lead me to be quite confident about the organic growth story ahead.

Okay. The same question was on new contract wins. You mentioned that it is record win for the company. So are these only new orders? And what is the split between the segments, DaaS, Distribution and Martech? And also, if you look at in terms of comparison to your revenue, it looks to be very low. So how should we interpret this data point?

Yes. So I'll let Tanmaya comment on the split between the different business lines. A couple of sub-questions in your question that I will address. So a large part of our contract wins was really new -- cross-selling new products to some of our existing customers. So something that I've indicated is if you look go back 2018, we were a 2, 3 product company, and now we have 12 products and something that I've been insisting on our growth strategy is our ability to cross-sell and upsell new products and capabilities to the large enterprises. So a substantial part of our new wins were with the -- with our some of our existing customers buying some of the new products. So it was a cross-sell initiative. And your question about this -- in terms of the new contract wins, it doesn't seem very, very large compared to the overall revenue of the company. So the way to think about this is incremental revenue. So when we report on new contracts wins, we do not report on business that is getting renewed. So let's say -- and that's the function of a SaaS business model that, let's say, if I have INR 100 of revenue, and I'm telling you that the INR 100, I will -- if our GRR is, let's say, INR 90 out of that, INR 90 is getting renewed, although it could be also qualified as revenue win, but we don't report it like that. We report only net new win in the new contract wins. So going back to that example of INR 100, let's say, we are renewing INR 90, and then we add another INR 50 on top. Our total revenue for next year will be INR 90 plus INR 50. So that's how you should be look at that data point. I mean we're happy to get into a more detailed discussion to help you draw out that bridge.

It was very helpful. Maybe Tanmaya, if you can mention the split and...

Yes, so this quarter, it was like -- we had a couple of marquee deals signed, one is in Distribution where one of the large hotel chains signed up with us for a multimillion-dollar deal. So this quarter, it was more skewed to our Distribution, like 63% came out of Distribution, around 25% from DaaS and 12% from Martech. That's the split for the Q3.

The next question is from the line of Anmol from Albatross Capital.

Congrats on a great quarter. So I have a 2 questions. My first question is on the Adara acquisition. So what are the integration costs, if any, can we see in Q4?

Sorry, what are the -- sorry, integration costs?

Integration costs relating to Adara that we can see in Q4. Is there -- are there going to be a cost like that? Or if any, you can quantify this?

No. There will be obviously certain travel costs, some overlap of resources and all. But in the guidance that I have given, despite all those costs in build, we are expecting a 5% EBITDA in that business in Q4. So yes, so despite factoring in all those transition and integration costs, we should be able to deliver a 5% EBITDA in Q4.

Okay. My next question is on your cash utilization. So I can see that you're sitting around INR 400-odd crores of cash on the books. So just wanted to know your thoughts on what is going to be the utilization of that line?

So the INR 432 crores out of that INR 120 crores, we have already utilized post Q3. So we are currently actually -- we have added some cash in -- good amount of cash in January. So we're currently sitting around INR 335 crores, INR 340 crores cash this point of time. So certain amount is as per the IPO proceeds around the 2 objects on tech investments and AWS investments, which will roughly take around INR 90 crores out of that. The rest of the balance cash is internally accrued cash over the years. So obviously, as Bhanu said, the M&A program is a very much a key strategy for us. So ultimately, what we see is that when we are ready for our next acquisition when the integrations are done and all, then those will be utilized for inorganic expansion or any organic expansion into new products, et cetera.

So given the fact -- I'll just add to it, given the fact that given the fiscal discipline that we have and the margin expansion that you're seeing, we're adding cash now, every month from a free cash flow perspective, in a company our size, we're adding a good amount of cash. So I don't see this cash being utilized for -- in the near term for any of our growth initiatives because we are generating enough cash to organically fund that through our accruals. So most of this cash would be, targeted towards M&A and something that we've always said that M&A has been a forefront, and you saw the Adara deal also that we have done. So I do believe similar opportunities will present itself, and we still have a very, very robust pipeline. But -- at the same time, as Tanmaya pointed out, I think there is some degree of work that we need to do to digest the Adara acquisition and post that we will be getting more aggressive again to see if there are assets available at the right price that are complementary and match our vision.

The next question is from the line of Rohan Nagpal from Helios Capital.

My first question is, how exactly are you measuring recurring revenue? So I think you said 77% of your revenue is subscription-based and then 99% of it is recurring revenue. So are you -- is there a certain -- so how does this work out, especially in the Distribution vertical where you're looking at a certain number of transactions and you're charging customers per transactions for at least some chunk of your revenue. So are you billing on a certain number of transactions upfront? Or like how does this work?

So the recurring revenue means the contracts are recurring in nature. There is no onetime contracts like doing a development or bespoke, et cetera, right? So even if like -- so subscription revenue is pretty clear, right, for the rest of the transaction-based revenue, the contracts are kind of recurring because they're all auto renewal contracts, evergreen contracts. So if, say, IHG -- a big hotel chain is doing transactions through our pipes, the contracts are there for now 15, 20 years, getting auto renewed every year for another year, right? So obviously, the volume will vary, year-over-year. But in terms of nature of that contract is evergreen or recurring in nature.

Got it. So it's not necessarily that you will retain 99% of the revenue. It's just that you expect to have that transaction sort of that flow keep coming.

Yes.

And then my next question was on how you are measuring LTV to CAC because, I mean, frankly, LTV to CAC at 23x if off the charts. I don't know of any SaaS businesses that do it. But what we're seeing is LTV to CAC of 8.9x in Q1, 12.2x for the first 2 quarters and then 22.8x for the third quarter for the first...

So this quarter has been, as I said, is the biggest quarter in the history of RateGain. And LTV to CAC is a functionality of gross margin and retention rates. And as I said, the 60% of -- 65% of that INR 49 crores that was closed won this quarter, contributed from distribution business, which has got like very less churn rate, it's like less than 5% churn rate in that business and gross margins are as high as 90%, right? So that's why it looks pretty high this quarter, but it is what it is. So because Distribution business contributed that much which has got like less retention and high gross margin, the LTV to CAC looks high.

So I understand that. But -- so are you telling me that the 22.8x LTV to CAC is for Q3 and not for the 9 months of FY '23?

That's right.

Okay. Because your presentation says 9 months FY '23.

Okay, let me check on that, and I'll get -- probably get that.

Yes, because I think Q1 was Q1, Q2 was H1 and Q3 was 9 months so it just -- if you could clarify that. Okay, since that was -- that is most likely a misstatement, could I just pose one more question?

Yes, please. Please go ahead.

Yes. I just -- so on this -- on Martech, one of the key highlights that you guys have mentioned, these are big digital offering that's allowed you to double your ARPU and increase the net retention. So could you just talk a little bit more about the digital media offering? And I think from our FY '20 or FY '19 your ARPU for digital marketing -- for Martech seemed to be around the $25,000 number. So is it fair to assume that's now at closer to $50,000 a year?

Sorry, can you -- Rohan, can you repeat the second part of the question? I got the first part.

So I think if we look at FY '19 and FY '20 Martech numbers, those imputed ARPU is about -- is on the order of $25,000 to $28,000 a year. So is it fair to assume that this number is now trending north of $50,000 a year?

Yes. No. That is not the case. So okay, let me just take a step back and give you a sense on what are the Martech offerings, right? So instead of taking product names, I'll just at a high level, tell you what are the key capabilities that we sell. So we sell the capability of brand management, which is basically engaging with the demographic that the hotelier is interested and then mostly leading this for luxury hotels. So it's basically doing creatives and doing posts on Insta and Twitter and Facebook and engaging with the affluent traveler so that they can build a captive audience. The second thing we do is brand management. So it's very important for especially the luxury hotels that they maintain brand reputation by monitoring what people are posting on Facebook and Insta and also responding to it, especially in a crisis situation, so that they don't let it go out of hand and they can do damage control on the brand. The third thing that we do is PDM. So basically, it's brand management, brand monitoring and engagement and PDM. And paid digital media is all about, it's more sort of top of the funnel, middle of the funnel and the bottom of the funnel to get customers to come to your that side and actually make good bookings. The KPI is largely around driving direct cookings on your website. So where we have seen the ARPU double is in the PDM offering. And the reason that has happened is in case of our PDM offering, we have different commercial models that we go to the hotel with. And these are popular ad tech models like CPM, CPC and CPA. And what we were effectively able to do is sign up a few customers on the CPA model, which is actually get paid as you do -- it's sort of pay for performance type model and as you increase the number of bookings -- and also if you get in customers that have higher ADR values, your -- basically, your take rate goes up because you're being paid based on performance. So there was a movement to taking on some of those kinds of customers, and it yielded great returns for us. Also, we were coming out of COVID so as hoteliers began to spend more even on the other commercial models like CPM and CPC, the marketing budgets just went up. And as a result of which our fees went up as well. And that's why you see the increase in the ARPU on the PDM.

So PDM is kind of like performance marketing that you're running for the ohms -- for the -- that is on it. And so Metasearch is specifically KAYAK, Google Flights, et cetera, et cetera, and PDM is more Google SEO plus any other search engine SEO plus Instagram, Facebook, et cetera. Is that perfect...

Yes. In our PDM, you're absolutely right. It's basically it's search, social and even Meta. So we include Meta in the PDM as well because from a hotel's perspective, you could -- it could be any channel. What they really care about is how many customers are they able to drive and get bookings on. So we basically include Meta in it also. And why Adara acquisition is extremely value accretive to us is now we'll be able to do display as well. So display as a channel was not something that we had. So display is largely when you go on different websites, and you get travel ads...

The banner ads, basically.

That is correct. So a, we are now with the Adara acquisition, able to do display as a channel as well. But more importantly, this is the most important secret sauce of why our PDM will become much more powerful than anybody else is the travel intent data that they have. So when you're doing performance marketing, it's all about figuring out what audiences to sell to. And what Adara data does is, it has the travel intent. So basically, what we will be able to do is apply that layer of intelligence to all performance marketing campaigns because we know, for instance, Rohan, you're about to come to Delhi. And we will, on our behalf of our customers, be able to send those targeted ads to you on display or if you're selling -- searching on Meta, we'll be able to target you and lead to that conversion because you're now targeting people more in the lower part of the funnel, thus leading to higher conversions, thus leading to a much better return on ad spend.

Do you have a sense of the incremental ROAS that you can drive through the targeted -- through the better -- through the improved targeting?

Sorry, I think yes, that's exactly the point. Are you making a comment or?

No. I was saying do you have a number on how much the ROAS could increase in terms of percentage points as a result of this better targeting?

Actually, there is a number, but I don't want to -- I don't have it on top of the head. But I will -- we can come back to you, but we do have that number. Actually, that's a number that we share in a lot of our marketing collateral for Adara as well when we try to go pitch to customers.

The next question is from the line of Shobit Singhal from Anand Rathi.

Congrats on a good set of numbers. So my first question is on the Martech business. So if I see we have grown only 3% kind of sequentially. So we seeing some budget cut in this segment similar to what other global peers are seeing.

No, it's actually -- as I mentioned to you, so I'll step back and reiterate that our Martech business is basically 3 capabilities. So brand management, brand monitoring and PDM. So as you can probably tell, the PDM is extremely automated. It is more of a platform and nonlinear to people really, whereas our solutions around brand engagement, brand monitoring are more -- it's more service orientation while we have a platform, it's a managed service platform. And at the time of recovery of COVID, we did sign up a bunch of customers because there is a dire need for people to -- especially for luxury hotels to build this -- to have the solution in terms of brand management engagement and monitoring. However, we did take on a lot of customers in our quest to add the number of hotels at that point. And what we are doing now is sort of cleaning up some of the sins that we didn't as part of our COVID recovery and letting go of some of those low-margin accounts given the overall focus on margins at a group level. So there was some pruning of some of the back contracts that we have. And I think there will be -- there will continue to be some pruning. So it will offset some of the growth that we are seeing on the PDM side. But at the same time, as I mentioned earlier in my opening comments as well, it's not going to be meaningful that it will impact any of the robust demand and numbers that we are projecting for this Q4 as well as year ahead in FY '24.