Route Mobile Limited (ROUTE) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. I am Yosuf, moderator for this conference. Welcome to the conference call of Route Mobile Limited arranged by Concept Investor Relations to discuss its Q2 FY '24 results. We have with us today Mr. Rajdip Kumar Gupta, Managing Director and Group CEO; Mr. Gautam Badalia, Group's Chief Strategy Officer and Chief Investor Relations Officer; and Mr. Suresh Jankar, Chief Financial Officer. [Operator Instructions] Before we begin, I would like to remind you that some of the statements made in today's earnings call may be forward-looking in nature and may involve certain risks and uncertainties. Kindly refer to Slide #2 of the presentation for the detailed disclaimer. Please note that this conference is being recorded. I now hand the conference over to Mr. Rajdip Gupta, Managing Director and Group CEO, Route Mobile Limited. Thank you, and over to you, sir.

Thank you, Yosuf. Good evening, everyone. I hope this finds all of you in good spirit as we near the festive season. I have some exciting news to share tonight. Even though the month of July and August typically see downturn for us given the holidays and unusual -- a usual dip in global volume. Route Mobile has not just preserved the volume but also soared in registering our highest-ever revenue. In fact, even amidst of the global challenges, our year-on-year growth in both revenue and PAT in H1 FY '24 has exceeded over 25%. This past quarter has been pivotal for us, marked by securing several significant deals that promises to propel our growth trajectory. Here are some of the standout agreement we have clinched. First off, collaboration with Vi India this quarter. It's a major international A2P termination and firewall management services deal and one we are particularly proud of. Our history with Idea and now our reengagement with the merged entity, Vodafone Idea underscores our platform robustness. This association alone has the potential to bring around USD 100 million in revenue. We are gearing up and in process of deploying our firewall, which will go live very soon. In Southeast Asia, we clinched another major international A2P termination and firewall management service deal and it's already live and running. Finally, there is a global e-commerce giant we partner with. In Q1 FY '24, they are onboarded and live with us now. In fact, now we are expecting to gain more traffic from international destination, including India. This win -- this big wins make me confident in saying we are on track for our annual revenue growth of 20% to 25%. And frankly, we might just hit that top mark. Additionally, since Q1 FY '24, we all hit several milestones. We got -- some of them are, we've got a nod as a major provider in Gartner CPaaS Magic Quadrant of '23 and we're featured in 4 Gartner Hype Cycle report this year. We have forged a significant partnership in Bangladesh with Robi Axiata Limited focusing on RCS business messaging. We successfully launched Route Amplify, our flagship event. It was a melting pot of industry leaders, where we shared and gained insight into key areas like customer engagement and digital identity. Our new product revenue has shot up by staggering 64%. Our collaboration like the one enabling WhatsApp-based ticketing system for Delhi Metro only goes on to prove our innovative product development. Now for our deal with Proximus Group, everything is on track. We are eying to wrap up by quarter -- Q4 of '24. We have even set up our integration governance committee, pulling in senior leaders from Proximus, Route Mobile and TeleSign, all working together to ensure smooth sailing. And every step we have taken so far, it just reinforces our confidence in this partnership. I'm personally thrilled about what lies ahead, especially leading the CPaaS division post deal. Last but not the least, based on our sterling performance this quarter, the Board has approved an interim dividend of INR 3 per share. A big thank you to all involved. Now I will hand over to Gautam, who will share more about our financial highlights. Over to you, Gautam.

Thank you, Rajdip. Good evening, everyone. Seasons greetings to all of you. We have already uploaded our quarterly earnings presentation on our website as well as the stock exchange websites. Hope you had a chance to go through the presentation. I'll quickly summarize our financial and operating performance before opening the floor for Q&A. The quarter gone by has yet again been an outstanding quarter, considering the seasonality of the business. The key highlights for the quarter gone by has been the large deals that we have won, as highlighted by Rajdip earlier. The throughput from some of these large deals should start to reflect from Q4 onwards. Hence, we believe that we will be closer to the upper end of our revenue guidance band of 20%, 25%. More importantly, FY '25 looks very promising on the back of full year effect of this large deals, plus the benefits of synergies that should start to flow to Route Mobile from the Proximus deal. In terms of the update on the Proximus transaction, as Rajdip highlighted, the regulatory filings are well on track, and it seems that the transaction, including the mandatory tender offer should close during Q4 FY '24. In terms of the synergy that was called out at the time of signing, we have been able to further validate the same based upon the interim work done so far. Based on the exhaustive work done over the past 6 weeks by the integration governance team, we reconfirm that the overall EUR 90 million or USD 100 million EBITDA synergies stands completely justified. Out of these some of the synergy buckets where Route Mobile will stand to benefit are as follows: In terms of Bucket 1, which is the revenue and cross-selling synergies. Route Mobile will leverage the digital identity platform of TeleSign in emerging markets. Digital identity as a product is a very unique SaaS offering, which is used to curb digital frauds and entails gross margins, which are northwards of 80%. Route Mobile will also be making inroads into untapped large global accounts through TeleSign to service their requirements in emerging markets. In terms of the synergy Bucket 2, which is OpEx savings and synergies, create a state-of-the-art product innovation lab in India to focus on new product initiatives, automation and AI/ML capabilities, drive economies of scale by consolidating the cloud infra, software licenses and vendors across the group and work towards a low-cost operating model through the shared service center construct and leverage the capabilities of our BPO arm, which is Call2Connect. In terms of synergy Bucket 3, direct cost synergies, drive better efficiencies owing to higher economies of scale and deepen as well as expand our exclusive MNO connects. These initiatives will definitely accelerate our journey towards $1 billion revenue with 15% EBITDA margin target by 2027. Just to further reinstate, these deals will pave the way for Route Mobile to be a global CPaaS player in true sense with an unparalleled reach and a very comprehensive product stack of its own products, coupled with licensed products from the group. By virtue of this deal, we should be able to demonstrate "cost leadership at scale with industry-leading growth rates." As I said, this is only an interim update and will be fine-tuned further. As and when these are further crystallized into the final operating model, we shall update you on the same. Highlighting some of the key business metrics for the quarter and the half yearly numbers gone by. In volume terms, we processed over 31 billion transactions in Q2 FY '24, which is again the highest quarterly volume -- billable volumes processed by us till date. Billable transactions increased from 26.9 billion in Q2 FY '23 and 29.5 billion in Q1 FY '24 to 31.3 billion in Q2 FY '24. Average realization per billable transaction marginally decreased from INR 0.328 in Q1 FY '24 to INR 0.324 in Q2 FY '24, owing to increase in domestic volumes in India. In terms of geography, India continues to be our largest market by termination, accounting for 47% of our revenue by termination. You may refer to Slide 20 of the presentation. Domestic volumes in India witnessed a double-digit growth despite the NLD price increase. We continue to witness very strong momentum on our next-generation products. New product revenues grew by 64% on a Y-o-Y basis and 53% on a Q-o-Q basis in Q2 FY '24. In terms of operating overheads in Q2 FY '24, employee benefit expenses decreased primarily due to rollback of performance-based stock options and cancellation of ESOPs owing to resignation by a few employees. The increase in other expenses was primarily due to foreign currency translation loss of INR 91 million and increase in travel and business promotion expenses, both totaling to an increase of INR 30 million. The business promotion expenses was largely related to a flagship Route Amplify event, which was held in Mumbai. In terms of EBITDA, EBITDA grew by 16% Y-o-Y from INR 1,094 million in Q2 FY '23 to INR 1,268 million in Q2 FY '24. There was a sequential growth of 2.5%. From a balance sheet standpoint, average receivable days stood at 73 days and average payable days stood at 64 days. Normalized cash flow conversion in H1 FY '24 was very strong at 77%. You may refer to Slide 16 for the same. With this, we open the floor for Q&A.

[Operator Instructions] First question is from the line of Ronak Chheda from Awriga Capital.

Congratulations on the results, first of all. I have 2 questions. First question is on the e-commerce giants business, right? We've done a multi-geography deal. So can you just explain on this further? And how much of this business would broadly split into India and the other emerging geographies? How should one think of the deal itself? That's the first question.

Sure. So yes, Gautam, let me just answer this question.

Yes, yes, sure, Rajdip.

So Ronak, I think India is going to be at least about 50% of the revenue and remaining 50% will come from international. We have signed a contract with this e-com giant for 10 countries and including U.K. and some of the Asian countries as well. And I think the connectivity and the binding is already done and the testing is also done and we already started getting traffic for India. So we believe by next quarter -- maybe by this quarter, we can see more traffic. But in terms of split, I think 50% revenue will be India and remaining 50% will be for international.

Understood. That was helpful. My second question is on -- you actually touched upon in the opening remarks on the synergies, which could flow from the merger process and some business coming from TeleSign. I mean how soon can we start looking at that in the results itself? Will we wait for the deal to complete and then this will flow? Or we should start seeing it from this quarter itself?

Gautam?

Yes. So see, I think we're kind of, at this point in time, working on wire frames. But even before the deal, TeleSign was a partner with Route Mobile, and we used to help them for some part of their termination into emerging markets. That continues as is. In fact, the throughput on that has increased to some extent, but I think lion's share of synergies will start to flow post closing.

Okay. Understood. And just last bookkeeping question on your working capital. I see the receivable days have gone up. Should we read too much into it? Or this is just a quarterly phenomenon?

Yes. I mean, you shouldn't read too much into it. In fact, a few days post the closure of the quarter, I mean, we received a one of the payments from a large OTT player. So I mean, we also have to account for July, August and even September to an extent. I mean, these are typical holiday seasons, I think, in most of these places. So I think that you shouldn't read too much into it. I think from a free cash -- or our operating cash generation standpoint, I think probably we've done fairly well.

Next question is from the line of Nikhil Choudhary from Nuvama.

First question is regarding Vodafone Idea deal. I hope you understand that given the contradictory filing by both the companies when they are also contracting you. We just want to understand how basically you accounted for USD 100 million in -- given its potential? And any rough time line in terms of when you will be able to materialize it? That's my first question. I have a follow-up.

So Nikhil, I think, as I said already, the deployment of our firewall is already in process. And based on the current time line, which we have given to Vodafone Idea, we are looking out to go live by -- in December, so that's the current time line we have. And what was your other question? How we quantify $100 million?

Yes. And time line of that recognition.

So it's very simple math, right? If you see the number of subscribers, what Vodafone Idea has about $200 million and you multiply it by particular SMS, and then you see $0.05 per SMS cost. I think that is the kind of math we have done at our end while giving this number to the market. And we believe that the number may be more than is $100 million, but we are a little bit conservative with giving that $100 million number.

So is it fair to...

This entire revenue, because of our exclusivity, will flow through Route Mobile. So this revenue -- I mean whosoever gets the pie of it will have to necessarily terminate through Route Mobile. So we get the 100% pie of this revenue to Route Mobile.

Sure. So is it fair to assume, Rajdip, Gautam, that this $100 million will start flowing from quarter 4 of '24 and next 12 months, we can see it flowing through our P&L?

So you can consider quarter 4, yes, you're right.

Sure. Second question is in terms of ILD revenue. This quarter, while NLD has done quite well, which you have highlighted, ILD, we have seen decline. I think it's maybe due to volume decline. Can you please help us understand what led to that?

So I think -- as I said, seasonality, right? We always need to understand that H1 is 45% of our revenue and H2 is almost 55%. Now Diwali and all the other festive season is going to start in the month of -- this quarter, especially. So we will see the growth. And I think there's nothing -- the dip is basically based on the seasonality and nothing to worry about. And we have seen the growth in this particular, in fact, October month, and we see the growth going to come in November and December as well on ILD business.

Sure. Sir, just last question from my side. You have highlighted in your cash flow statement about INR 297 crore basically deposited for firewall deal. Based on the filing by your competitor, INR 57 crore is a revenue basically just from the firewall deal. And you have highlighted earlier, we generally deposit 3 to 6 months of payments to telecom operator. So I just want to understand how big is maybe the other contract? Or what kind of ROI we are looking, if my calculation is right maybe.

Sorry, can you please repeat your query, I didn't understand what was the query. So we have given this INR 297 crores to 2 operators. And for one operator, a partial payment was made last quarter, as the final payment will be done once we are close to going live.

So Gautam, what I want to understand is the quantum of Vodafone firewall deal based on disclosure by the competitor who lost the contract was about INR 57 crore for annual, right? So I just want to understand, and given it was one of the biggest firewall deal, what basically led to deposit of INR 300 crore, which is much larger...

Okay. Okay. No, let me just correct you. I got your question. So there is 2 stream of revenue, okay. First is firewall revenue, which is firewall deployed by 365squared, a Route Mobile company, and there's a revenue share between 365squared and Vodafone, okay? That is a separate. Then when all the traffic, which flows through Route Mobile platform to Vodafone Idea, that's additional revenue we generate. So I think if you're talking about one firewall revenue, which is separate, I think that number comes to the number which you are talking about, then there's additional revenue potential and margin which Route Mobile generates traffic directly with working with OTT players. So you have to consider it in that way. And that is the potential we have seen in this overall deal, and we believe that our platform is going to play a very critical role to mitigate -- to at least mitigate the risk for the grey routes which was still there on their network. And we identified certain grey routes which has been used. And with our firewall, we believe that we will mitigate those risks of grey route. And we will definitely deliver the commitment which we are already made to Vodafone Idea.

Sure, Rajdip. Very helpful. Good luck for next year. Gautam, you were saying something.

Also, Nikhil, I mean, the deal, I mean, from when it was with the erstwhile partner and moved to us, I think the price has also moved quite a bit. So the deal value per se, I think, would have more than doubled, right? So it is not an apples-to-apples comparison from that perspective. So I think we also have to kind of take that into our account.

Next question is from the line of Sarvesh Gupta from Maximal Capital.

Sir, just on the realization piece, so I think we were expecting some increase in the realization, but because of the mix, it has come down a bit. But net of the mix impact, is there -- what has been the realization increase for this quarter, like-to-like?

Yes. If we adjust for the sharp increase in our domestic India volumes, the average realization would have marginally gone up.

Okay. Okay. And we understand the seasonality, but I think the Y-o-Y growth has sort of come down a bit in this quarter. So any particular color that you can provide there?

No. So the base has also kind of increased quite a bit and Y-o-Y, I mean, we demonstrated -- you're talking about it from an H1 standpoint or quarterly standpoint?

No, no Q2 Y-o-Y versus Q1 Y-o-Y, I was alluding to...

Sequential?

Stronger. No, no, sir, not Q2 over Q1. I was saying Q2 versus last year Q2 and Q1 versus last year Q1. So this Q2 versus last year Q2, growth rate has sort of come down a bit compared to what we saw in Q1.

No, sir, last year, I think there were a few acquisitions also that got baked in. And now everything has been kind of consolidated with a larger base, I think we're talking about for this year, growing at a 20% to 25% on a Y-o-Y basis. And within that, I think basis, some of these deal wins we're talking about hitting the top end of that band.

Understood. And finally, sir, you mentioned about some revenue mix on employees, et cetera. So this is like some [ par course ] resignations? Or these are some of the efforts towards the rationalization or...

No, no, no, it's not towards rationalization. So what had happened here and this, I think, we have called it out multiple times in previous calls also, a lot of the cost, I think that was there in terms of the employee benefit expense was attributable to the ESOP cost, wherein a lot of that cost was front-loaded. And in the past, I think when we had issued this or granted this ESOP under the ESOP 2021 scheme, a lot of these ESOPs were rolled out to employees and there were performance criteria. So wherever, I mean, employees have not been able to perform, those ESOPs have kind of been relinquished. On top of that, there are some cases where employees have resigned and hence, some of those ESOPs have been kind of rolled back. So it's completely entirely on performance and owing to resignation of few employees.

Understood, sir. Is there a way to quantify the deal with the large e-commerce company? Any sort of a number are we looking at?

So we are -- Sarvesh, we are in very early stage of our live traffic. Probably, we can quantify this in more detail by next quarter or by this quarter end and once we have our next quarter earnings call.

Next question is from the line of Dipesh Mehta from Emkay Global.

A couple of questions. First of all, I just want to understand, I think you partly alluded about the guidance kind of thing. Now even for lower end, I think you indicated about last time at least 20 percentage and in the earlier prepared remarks, you said 20 to 25 percentage and high chances of hitting upper end, so which is roughly, let's say, 25 percentage, which require very significant acceleration in H2. Even to reach 20 percentage, you require 15, 16 percentage growth over H1. Another way to put is 9 to 10 percentage CAGR to hit lower end. So can you help us understand -- I understand about seasonality in December quarter, but it is materially higher, even including Vodafone deal seems to be very...

So Dipesh, I think if you also consider the e-commerce client, which is -- which has gone live now and that effect is going to be in this quarter and next quarter, plus the Vodafone deal. We are also working on certain more firewall deal, which we will announce very soon. But keeping all this in mind, I think we are very much sure that we will achieve our guidance which we have given to the market.

So more like 25 percentage you are confident?

Yes.

Yes, it will be closer to the 25% than 20%.

Understood. Sir, second question is about the security deposit. I think we mentioned 2 MNO for the roughly around INR 300 crore kind of number. Whether any payment is related to Vodafone also covered here?

Yes, part of it.

Okay. And in H2, you expect any material number or this number will taper off materially in H2?

No, H2 also I think there will be -- some bit of that will come through, plus 1 other deal that I think Rajdip talked about if that happens.

Okay. In that case, your reported OCF might be still very muted, right way to understand it?

No, no, that's correct. But I think from -- I think we've always been kind of very, very particular that some of these are capital kind of -- CapEx kind of investments, where we are investing this for 2 years with 2 years payback, where the ROCE tends to be northwards of 25%. So I think once we are done with this additional -- this new deal as well, I think our plates will be completely full. And for the next 2 years, I think you'll be able to see meaningful improvement, I mean, in OCF, not only a normalized OCF, but even the reported OCF.

Understood sir. So 25% will be much better from reported OCF also.

That's correct.

And last question from my side is about new product, I think, very strong growth. So I just want to understand what explains this and how you expect that trend to continue?

So Dipesh, I think we are investing heavily, and I think our focus is always on new product along with messaging. And the kind of pipeline we have as of now, and we believe that growth is going to be significant in coming quarters.

Is it single product driving it in terms of WhatsApp or you...

No, no. No, it's a mix of product, which we have -- as a omnichannel stack, which we have. So it's a mix of all products.

Next question is from the line of Amit Chandra from HDFC Securities.

So my first question is on the volume growth. So obviously, we have seen both NLD and ILD price hikes, and we have seen some volume drops because of the increase in price. So how do we see the volumes from here on in terms of the -- like the NLD volumes can also come down because there has been a price hike and if I'm not wrong, the volumes are down in this quarter. So do you have an aberration? Or is it kind of going through something that they are finding some other alternatives?

So Amit, Rajdip here, our volume on NLD has grown. It has not gone down.

Yes, double-digit growth.

Yes.

Okay. And -- but overall at industry level, I'm just talking about at the...

See, I cannot comment on industry level based on the customer base we have -- based on the customer we onboarded in the last few quarters. We see a significant growth in those customers and due to which our volume has increased in spite of price increase at NLD level.