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

Ladies and gentlemen, good day, and welcome to RateGain Travel Technologies Q4 and FY '23 Earnings Conference Call. 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 the 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 of RateGain. Thank you, and over to you, sir.

Thank you very much, and a very good afternoon to everyone, and thank you very much for joining the earnings call for RateGain Travel Technologies Limited for the fourth quarter and full year ending March 31, 2023. It's great to connect with all of you again, and we're excited to share some key highlights from our past quarter and past fiscal year. Joining me on the call are Mr. Tanmaya Das, our CFO; Mr. Divik Anand, our Head for Investor Relations; and Mr. Thomas Joshua, our Company Secretary of RateGain. We announced our fourth quarter results for the fiscal year 2023 earlier today, and I hope you've had a chance to go through our financial results, the press release and investor presentation that are available on the stock exchanges and also on our company website. It has been a spectacular year for us on many fronts. It has been a record year in terms of revenue for the company with well-rounded robust growth across all segments. Our revenue for FY '23 stood at INR 565 crores with a growth of 54% Margin improvement has been strong as we reported a 17.6% EBITDA margin in our Q4 and 15% for the full year, well ahead of the guidance given at the time of the IPO of 200 to 300 basis points expansion from the 8.3% margin we reported last year. We had our best quarter ever in terms of new contract wins and for the year as a whole with a record 543 customers added over the course of the year. We completed the acquisition of Adara, our fourth acquisition in the past 5 years to build the world's most comprehensive travel intent and pricing data platform to help the travel industry improve their marketing ROI. I'm happy to report that the initial integration has gone off very smoothly with the Adara team pumped up with another great quarter of new business closings for them. The growth potential associated with Adara seems significant, and our low-hanging fruit is to bring back Adara to its pre-COVID glory days of being a $100 million company. Adara's addition has also been a significant milestone and an addition to our leadership team with stellar team members from Silicon Valley with great pedigrees. This has also been a significant event in terms of building leadership and talent capacity at RateGain. We have a very strong pipeline of INR 381 crores as we move into the next year with a host of conversations underway with our customers as we look to capture the opportunity and deepen relationships with them with our white product offering. We continue to invest into the future growth of our business by using AI as the challenges that our customers face continue to evolve rapidly because of both internal and external factors. We continue to work towards our vision of providing revenue maximization opportunities that helps our customers to acquire guests, engage and retain them and have a wallet share expansion with them. Building towards this vision, we launched our virtual concierge service this past year, our equivalent of ChatGPT, which is called Engage AI to help our hotel partners to have an easier communication medium with their guests. We continue to work on some other significant opportunities, which we will be launching later this year under RG Labs. We are also exploring the use of generative AI to drive operational efficiencies within the organization to help solve for customer queries, extract data more efficiently and also specifically enhance certain products around brand engagement. We generated 3x the free cash flows as opposed to the previous year with the free cash flow for the year being at INR 52 crores. It truly has been a great year for us, and I would like to commend and congratulate the entire RateGain team who's been the driving force behind it, and I'm confident in their ability to continue to do so in this current fiscal as well. This past year is also a validation of the faith shown by our long-standing relationships with industry leaders that continue to trust us as we help them unlock new revenue. We posted another quarter of healthy growth across all 3 verticals with strong performance on the margin front with an operating margin of 17.6% on the back of operating leverage and some cost optimization measures taken to drive healthier performance across business lines have started to bear fruit with early signs of stabilization in those business lines. Our business lines, DaaS and distribution which are also our high-margin businesses continue to witness good traction with good volume growth with existing clients, steady travel demand and continued monetization of new logos added in the past quarters. Our Martech segment continues to find flavor with healthy client additions in the quarter gone by and continued focus of customers on direct guest engagement. On a run rate basis, our annual recurring revenue is now around $100 million, another significant feat as we continue to scale up. While the global technology environment continues to be challenging, RateGain continues to be one of the few global SaaS companies that's growing sustainably and profitably and exceeding the Rule of 40 benchmark comfortably. Growing global travel recovery continues to remain strong, and we have also seen healthy booking volumes on our connectivity platform for the summer with the opening of Asia Pac. The global travel health by Skift hold steady at 97% with all key geographies improving over 2022. Despite inflationary fears looming, booking trends remain favorable, but we continue to maintain a cautiously optimistic outlook that travel growth will continue to remain steady. The business and technology world has been buzzing with the use and implications of generative AI. We believe that we are now entering a new era of technological disruption, which will end up transforming the way consumers and travelers engage with brands and products. The travel industry is getting ready to embrace this new AI revolution and move away from legacy technology and RateGain being one of the pioneers of AI and cloud technologies is emerging as a trusted partner to help our customers leverage AI to transform their existing revenue management, distribution and brand engagement to drive better outcomes. RateGain has been at the forefront of using AI for the last 1.5 decades, using it for driving operational efficiency in our products and engineering teams as well as using it to enhance outcomes for our customers. Across our DaaS distribution and Martech business units, we've been using AI to give actionable insights instantly from millions of rates to automatically recommending demand partners on our connectivity platforms as well as tracking real-time travel intent for leading brands. These are just a few ways we are driving innovation using AI and are continuing to invest in finding new cases to solve. The key differentiator in travel for the success of generative AI would be the quality of data it has to access for training its model. RateGain has a huge advantage over its peers as we have a made huge data lake with billions of price points that gives us an advantageous position. RateGain is now using generative AI to solve for multiple use cases. Number one, improve our GTM by utilizing generative AI tools. Number two, optimizing conversion in the traveler journey by generating hyper-personalized content and solving for issues of cart abandon in cases of incomplete purchase. Number three, using generative AI to act as an automated QA tool for content creation. Number four, provide self-training on different products using the ChatGPT platform. We continue to make calibrated investments in growing our sales team in certain geographies. We've added more sales folks at all geographies, including U.S., Latin America, Middle East and APAC. These investments will have about 6 months lag, but should show up in accelerating our sales numbers 2 quarters down. From a marketing perspective, we continue to accelerate our digital spend as well as participation at events worldwide. All of this goes towards contributing to the strong pipeline of INR 380 crores in growth potential for our company. With that, I will now briefly touch upon the performance across our 3 business units, starting with Distribution segment. This division accounted for 34.4% of our total revenue. We witnessed healthy volumes growth in the past quarter with demand across OTA and GDS channels, along with growth across the midsized hotel chain segment. Expedia's recognition of RateGain as an elite connectivity partner is a validation of the reliability of services we are providing to our partners as we help them grow the businesses on the Expedia marketplace. Our Martech business continues to grow at a healthy pace, contributing to 37% of our total revenues for FY '23. We continue to make inroads into the APAC and Middle East region, and our brand engagement business witnessed good traction in the North America region. We've onboarded multiple properties with our comprehensive paid digital media solutions. Our end-to-end digital marketing further strengthened by the relevant audiences from Adara really make our value proposition to our hotel partners even more compelling, helping drive higher ROI for them. The DaaS business unit grew at a strong pace on the back of increased volume demand and expansion within our existing enterprise customers. Healthy traction across OTAs, car rentals and airline segments with new logo additions, including onboarding the world's largest vacation ownership business to help optimize their pricing strategy. DaaS contributed to 28.6% of the revenue for FY '23. Our M&A strategy continues to be one of the key pillars of our growth strategy here at RateGain. With the completion of the recent acquisition and integration on track, we continue to focus on building on the pipeline and have various engagements underway as we look to further strengthen our value proposition to our customers. We believe that the current environment is having companies hold out. However, as the increasing interest rates and its pressures catch up, it will create great opportunities for M&A, and we are all geared up to capitalize on such opportunities. On the people front, we saw a healthy improvement in our attrition rate quarter-over-quarter to 21.3%, and we continue to adopt best practices for an engaging and conducive work environment focused on employee welfare and growth. We continue to launch various initiatives, including our newly launched LearnGain portal and restarting the Trailblazers Club, which recognizes top performers across the company. All of these with the focus to build a sustainable HR focus on improving employee experience of our diverse workforce and making RateGain the employer of choice. In terms of awards and recognition, we were awarded the SaaS Startup of the Year by SaaSBOOMi amongst 10,000 SaaS companies in India. SaaSBOOMi, as you know, is an equivalent of NASSCOM for SaaS companies. This is a great recognition of RateGain as putting Indian SaaS on global map. This award is equivalent to winning the best movie at Oscars and a validation of the efforts that our teams put in towards building a sustainable SaaS business model. I'd like now to ask our CFO, Mr. Tanmaya Das, to take you through the performance of Q4 and the fiscal year 2023.

Thank you, Bhanu, and a very warm welcome to everyone on this call. I'm proud to report that the company has posted another strong quarter with robust revenue growth and margin expansion, along with a very successful integration of Adara, our newly acquired entity. It really has been a standout year for the company in terms of performance across all key areas, contributing to record revenue with commendable margin improvement. This is a validation of the underlying business fundamentals and the value we continue to drive for our customers and stakeholders. We witnessed healthy growth across all our 3 verticals with an improvement across all key metrics contributing to a stellar year is a true reflection of the efforts of the entire team. It is worthwhile to note that we consolidated Adara financials for 2.5 months in this quarter as the entity was acquired around mid-January 2023. For the year as a whole, the company reported a revenue of INR 565.1 crores with a year-over-year growth of 54.2%. We had a well-rounded growth from all 3 verticals with DaaS growing at 54%, distribution at 37% and Martech at 74% for the year. EBITDA grew by 177% to INR 84.6 crores for the year at 15% as against last year 8.34%. We saw strong operating leverage the company has as the operating cost increased by 43% as against revenue growth of 54%. The EBITDA achievement is significantly ahead of the guidance given at the start of the year, which was around 12.5%. Worthwhile to note that the 15% EBITDA was after consolidating Adara, the newly acquired entity and amounts spent on completing the transaction on legal and professional expenses. Our new acquisition, Adara, which was loss-making before the acquisition, registered a 10.35% EBITDA for the quarter due to a successful integration, which was completed in a record time in 75 days. Our PAT grew significantly last year to -- significantly to INR 68.6 crores from INR 8.4 crores, almost 8x, resulting in similar improvement in EPS, which increased from INR 0.83 to INR 6.3 per share. In terms of headline numbers for Q4, which is historically a strong quarter for us, the company has registered a 70% year-over-year growth and 32% sequential revenue growth with Q4 FY '23 revenue at INR 182.9 crores. Our EBITDA stood at INR 32.2 crores, which more than doubled from last year and grew 40% sequentially. Operating margin stood at 17.6% this quarter versus 14.2% in the same quarter last year and improving over the previous quarter as well. Proud to mention that the margin did not dip sequentially despite the integration of Adara and the onetime cost incurred in close the transaction. In terms of PAT, it almost tripled from INR 11.6 crores in Q4 FY '22 to INR 33.8 crores in the quarter gone by. Sequentially, it was up from INR 13.2 crores. However, we have benefited by a onetime positive impact due to creation of a deferred tax asset in our U.S. entities was INR 12.2 crores in U.S. due to the higher amortization cost and acquisition brought forward losses and lower profits till last year, we are not required to create deferred tax assets. However, this year, as profits are sold up to comply with accounting standards, we had to recognize the deferred tax asset. Without this onetime positive impact, the PAT would have been INR 21.6 crores for the quarter. The company continues to have strong customer relationships that are helping in building scalable, predictable and sustainable revenue streams. Gross revenue retention and net revenue retention stood at 90.1% and 110.4%, respectively, for the year. One of the key metrics that we track is revenue per employee, which saw a 68% increase over last year at INR 1.16 crores. And this was aided by high revenue per employee from Adara as well as organic growth without much addition to headcount. Our annual recurring revenue stands at INR 774.3 crores and pipeline continues to be strong and stands at INR 381 crores. We continue to have a strong balance sheet where our net worth saw an increase of 15% as compared to last year and stood at INR 709.7 crores. Our cash and cash equivalent balance for the quarter stood at INR 341.3 crores. Our cash from operations generated during the year increased 3x from INR 16.8 crores last year to INR 51.2 crores this year. In terms of guidance for financial year 2024, we expect to grow around 55% to 58% and end up around INR 875 crores to INR 890 crores revenue in FY '24. On the margin front, we expect to see a 200 basis point expansion year-over-year to 17%. Our Q1 is a soft quarter, both in terms of revenue and EBITDA due to seasonality of the business and also the annual pay review impact starts kicking in, in Q1. Our EBITDA margin in Q1 will be around 13.5% and gradually increase to 20% in Q4, delivering an average 17% EBITDA for the year. We expect to deliver a PAT of around 12% and EPS around INR 10 per share next year. With that, I would like to conclude my update, and we are happy to open the floor for the questions. Thank you.

[Operator Instructions]

First of all, congratulations on posting a great set. My first question is, sir, what would be the revenue for RateGain consol ex of Adara for the previous quarter since you said you integrated Adara for 2.5 months worth?

Yes. Adara revenue for 2.5 months was around INR 41 crores. So ex Adara, we would be registered around INR 141 crores.

Understood, sir. Also, sir, you mentioned that Adara was loss-making last year, correct?

Yes.

Okay. And what are we targeting like with our turnaround and integration for the next full year, what sort of profit would we target from the Adara acquisition?

Is to continue to grow the business what we guided last time around, which is around 15% growth and 15% EBITDA margin.

Our next question is from the line of Karan Uppal from PhillipCapital India.

Congratulations on a very strong numbers yet again. The first question is on margins. So the margin improvement continues to be really strong since last 4 quarters. So could you help me with the organic margins of the business, the core margins ex of Adara? And what led to such sharp increase?

So the organic margin, if I exclude Adara, we would register around 15.8% without Adara. With Adara, it's around 15% because Adara registered around 10.35% EBITDA margin. Yes, there has been -- so the reason for expansion in margin, like last year we were around 8.3%, improved to 15.4% on the account of the high level of operating leverage we have in the business because we have a 75% gross margin business. So majority of this 75% gross margin flows to EBITDA once the revenue organically grows, right? And most of our costs like headcount in tech or operations, et cetera, are not directly related to revenue growth. So that's why the margin expansion is possible.

Okay. And any outlook you can give segment-wise, DaaS distribution and Martech, what sort of growth are you looking in FY '24? And just a bookkeeping question. In terms of the tax rate, what should we assume in terms of the sustainable tax rate for the company?

Okay. On the tax rate, effective tax rate, we are around 16% to 17%, which is a good benchmark for Indian global companies, Indian headquartered global companies. I think 17% effective tax rate is a good benchmark. We are around that only, and we expect to be in that range going forward for the next couple of years. In terms of growth guidance, obviously, we have got Adara also. But from an organic perspective, we expect DaaS to grow around 30% because we are seeing a great traction in terms of our existing account expanding their volume requirements. We expect distribution to grow around 15%, market to grow around 20%. But with Adara, I think we should be able to expand, grow around 55% to 56% next year.

And in terms of DaaS, particularly in last couple of quarters, we have seen good addition of the airline customers. We have seen press releases of Akasa, Air India and then some airlines from Middle East as well as other geographies. So what is happening in terms of overall contribution of airlines in the DaaS segment?

Yes. I think airlines is a new -- relatively new segment for us. We are in this business for last 3 years only, there are around 300-plus airlines who can buy this data solution from us. And we currently have like 40-odd airlines in our PD. There is only one competitor that we're competing with. And so we are seeing a very good traction in terms of new logo addition in airlines, like if you see all the Indian logos are added at this point of time. And in different geographies also, we are continuing to add new logos. We're also seeing volume uptick by the large airlines, for example, Singapore Airlines and all the account size are also increasing quarter-over-quarter because of the -- because there is more travel, they require more data, right? So it's all related. So from both new logo addition perspective and existing account expansion perspective, it looks pretty well. It really grew well this year. So we expect similar kind of growth next year as well.

Mr. Karan Uppal may we request that you return to the question queue for follow-up questions as there are several participants waiting for their turn. [Operator Instructions] Our next question is from the line of Rohan Nagpal from Helius Capital India.

One of the things that came out a few -- a couple of weeks ago was that Expedia and Booking turned out record numbers of room nights booked. I think the sequential growth quarter-on-quarter was about -- the sequential growth numbers were about 30%. So that being said, RateGain's distribution number seems flattish. It's gone from about INR 54 crores last quarter to about INR 55 crores this quarter. So why is the disconnect, especially since a decent chunk of your distribution revenue comes from transaction-based contracts? Can you just give some insight into that? Am I audible?

Yes, you're.

Were you able to hear my question?

Yes, yes. I heard your question. Tanmaya, do you want to take that?

Yes, sure. So the booking in terms of the way our business is organized, so the planning of -- so basically, Q3 and -- Q3 is our -- the biggest quarter for distribution segment because all the planning of the bookings happen in Q3. And Q3 and Q4 are more or less similar in terms of historically from a seasonality perspective. Look, Booking.com and Expedia, yes, I agree, they have reported record number of bookings, but all bookings are not through our systems. We are limited to certain supply and demand side pairings. So from a historical perspective, my Q3 and Q4 are always neck to neck, whereas you will see a lot of growth from Q1 to Q2 and Q2 to Q3. So that's how historically it has happened. The other -- I think that's it, Bhanu. Do you have anything. Any other thoughts?

Yes. In terms of the overall growth, I think that a number of bookings that we did in terms of new business happened in Q3 and Q4 and some of the larger deals that we signed on have not really consumated, meaning they're in our order book, but they haven't been monetized. And some of that reliance is on our partners' ability to enable some of those pairings as well. So a large monetization of our business will happen really effective Q3 of this year of that order book, and that's when we should see a big bump up in revenues as well.

But overall, if you see the annual growth of distribution business is impressive, it's around 37%. So it's a little bit cyclical for us. where we compare year-over-year. So 37% growth is kind of in line with the bigger ones.

Right. But I mean, if the bulk -- if most of the OTA room nights booked in the world go through Expedia and Booking and they have recorded 30% sequential increases, it's natural to expect at least some of that to flow through, right? So is it just like -- I mean, it seems a little odd that these guys are channeling 30% extra -- 30% growth in volumes and you were reflecting almost like 2% growth in distribution revenue sequentially.

That's true. I think Booking and Expedia, if you talk about like most of the bigger chain, bigger hotels or supply side, they are kind of directly connected to Expedia and Booking. We connect Expedia and Booking to some of the suppliers, which are not that big. And also, we connect the supply side to other OTAs like Hotwire and Traveloka, et cetera. So yes, Booking and Expedia had a great year. Do we have these pairings that we want to connect to -- do the pairings for the supply side and demand side. And once -- and those pairings are live, then we probably will be more sync with how the OTAs are reporting to the numbers. So there is still a still has some way to go to completely relate OTA growth to our growth.

Okay. And -- but tell me this, if you're telling me that Expedia and Booking are directly connected to the enterprise customers, then how are you -- from where are you unlocking this growth that will get you in sync with those numbers moving forward? Like how are you going to -- are you breaking pairings? Or like how are you going to demonstrate revenue growth here?

There are a couple of avenues for growth. One is -- so our distribution business is, of course, pairings to the big OTAs, but we also do a bunch of mid-tier and tertiary OTAs that are sort of regional players. So -- and with the big enterprises, that's sort of been our greenfield as new and emerging OTAs appear. We are sort of first in line to do those kinds of connectivity and a lot of our growth has come from there. The second area of focus for us has been to expand sort of horizontally in terms of moving up the value chain and not just connecting these hotel chains to OTAs, but also becoming their complete distribution system, whether it's connecting to GDSs that is more of the offline channels on our travel agents book or the direct channel, which is the hotels website. So part of our efforts has gone into building this overall portfolio, holistic platform for distribution where we can own the entire distribution for some of these mid-market chains. So we are seeing some very, very good early signs of traction where we are piloting this integrated tech stack with some of the mid-markets. And I do think that it can be a game changer in terms of our distribution business, but we will only see -- because it's going to take some time as we're building and getting traction and we have to solve sort of some of the teething issues as we go. But I do expect this to really accelerate in next year. So it's not an FY '24 story, but more of an FY '25 and '26 story.

Mr. Rohan Nagpal may we request you to rejoin the question queue for follow-up questions. Our next question is from the line of , individual investor.

[indiscernible].

We request you to use the handset. There is a disturbance static from your line.

So I'm asking on the Adara acquisition. So currently, we are doing INR 40 crores of revenue from 2.5 months. And where do you see the potential in the scaling of Adara maximum capacity next year how big the revenue can be in Adara and the margin part?

So I think I understood the question to be what is the growth prospects and margin profile for Adara. So as I indicated earlier on the call and something that we guided last time around also, we are aiming -- it's a conservative number of 15% growth and 15% margin. And we are almost like 45 days into the first quarter, and I'm happy to report that I think we should -- internally, though we've set those targets, but I'm quite optimistic that as we learn more and we unlock newer opportunities that those numbers could get accelerated, but that's what we are guiding the market.

So it will be roughly around INR 300-odd crores in the next year or INR 350-odd crores for Adara, and thereon 15%...

Yes. So it's basically INR 27 million as of March 31. And if you do the 15% on 27 million, that's roughly about INR 31 million, 32 million. So converting it into -- by 82. So it's more like INR 250 crores, INR 260 and then a 15% margin on that.

Okay. And the second question is regarding the tech and exciting work you are doing at RateGain. I just wanted to understand what kind of work and -- in the Adara also as well as in your own team RateGain. And what are the things, like, can you share some -- any details regarding the tech work what about the tech work? What are you excited about this next year? Next couple of years?

Yes. So in terms of tech investments, we -- I would bucket them in 2 categories, right? So one is some of our mature products, we continue to invest and launch newer features in each of our product lines based on what the customer needs are. And then the second bucket, which always gets me excited is our RG Labs, which is all the new product initiatives that we launched. This includes our Rev AI, Demand AI, Content AI, Engage AI and then the integrated tech stack that we are working on that I talked about our holistic distribution platform. So these investments we made really we sold the 2 years ago. So we are not launching anything more new because we already have our hands full. And our focus is now really on accelerating the go-to-market on some of these new products because they are already live and continuing to accelerate the feature development so that greenfield opportunities that we are creating in some of the markets we're able to see that. And as I noted in my comments as well, we have been -- we've made a good degree of investments in this quarter in hiring sales folks across different geographies. But as you can imagine, there's always a lag between making those investments and seeing some fruit of them. So I do imagine 2 quarters down, we will begin to see some fruits of these investments that we've made into sales and marketing as well.

Mr. Aditya Jhaver, may we request you to rejoin the question queue for follow-up questions. Our next question is from the line of Ashwani Agarwal, individual investor.