Truecaller: Strong earnings growth ahead driven by Premium adoption
Research Update
2024-07-22
07:25
Analyst Q&A
Closed
Jesper von Koch answered 5 questions.
Redeye states that with improved growth rates for recurring revenues, Truecaller is quickly becoming more predictable and stable financially. Redeye believes the opening of iOS, which will enable Caller ID, combined with the recent fraud-insurance offering will further spur growth in Subscriptions. However, Ads remain under pressure albeit with good potential to bounce back significantly as the advertising market strengthens together with the launch of video ads. Also, with much easier comps ahead, Redeye anticipates a period of strong earnings growth. Redeye slightly raises its fair value range.
JV
AH
Jesper Von Koch
Anton Hoof
Contents
Investment thesis
Review of Q2: Strong growth in recurring revenues
Strongest user growth since IPO - Colombia and Nigeria stand out
Ads – Strong user growth, ARPU unchanged from previous quarters
Premium Subscriptions - Impressive growth
Truecaller for Business – Robust performance
Costs and margins – Lower gross margin but tight cost control
Outlook – Unchanged view on the ads market, but optimism around iOS, growth regions, and video ads
Strong earnings growth ahead driven by Premium adoption
New premium features set to improve premium adoption
Changes to financial estimates
Sales estimates
Fair value range
Quality Rating
Financials
Rating definitions
The team
Download article
Redeye thinks the Q2 report was slightly better than expected - being in line with consensus estimates on sales but beating estimates on adj. EBITDA by 5%. The key highlight, in Redeye's view, is the impressive growth in Subscriptions (+29% y/y and 3% above consensus estimates). The advertising market in India was unchanged in Q2.
During Q2, Truecaller launched several features that could significantly increase the adoption of premium plans - in particular the fraud insurance. Also, Apple opening iOS for Caller ID is also likely to be a significant booster for iOS adoption, which have 5x the adoption rate to a paid plan compared to Android. Should this be the case, Truecaller is poised to deliver outstanding growth in its recurring revenues. This would imply that Truecaller would become a more predictable and resilient player even in a weak economy with low ad prices.
Following the Q2 report, we only make minor adjustments. Mainly, we raise our estimates for Subscriptions by c7% for 2024-2026e, while we reduce estimates for Ads by 3-6% for the same period. Combined with small downward adjustments on OPEX (-3% p.a.), our EBITDA estimates are lowered by 1-3%. However, we believe now could prove an attractive entry point. The reasons why are 1) all tough comps are now past, 2) the ads market has likely bottomed, and 3) Truecaller increasing its share of recurring revenues, making it more predictable. Redeye increases its Bear Case from SEK25 to SEK28, but keeps Base and Bull case.
SEKm | 2022 | 2023 | 2024e | 2025e | 2026e |
Revenues | 1,785.6 | 1,740.5 | 1,856.9 | 2,340.4 | 2,903.9 |
Revenue Growth | 57.6% | -2.5% | 6.7% | 26.0% | 24.1% |
EBITDA | 717.1 | 702.9 | 683.9 | 945.5 | 1,200.3 |
EBIT | 688.5 | 657.7 | 631.7 | 903.8 | 1,157.1 |
EBIT Margin | 38.8% | 38.0% | 34.2% | 38.8% | 40.0% |
Net Income | 535.2 | 536.4 | 531.5 | 743.6 | 936.1 |
EV/Sales | 6.5 | 6.9 | 5.5 | 4.0 | 3.0 |
EV/EBIT | 16.7 | 18.1 | 16.1 | 10.4 | 7.4 |
P/E | 24.7 | 23.7 | 23.1 | 16.5 | 13.1 |
Case
Strong moats and high scalability set the scene for continued market dominance in a fast-growing and fragmented market
Evidence
Under-estimated moat and under-monetized user base
Supportive Analysis
Challenge
Watch out for the giants: Apple, Meta, and Alphabet
Challenge
Regulatory risks: Over-emphasized or real threats?
Valuation
Significant upside potential
Redeye thinks the Q2 report was slightly better than expected - being in line with consensus estimates on sales but beating estimates on adj. EBITDA by 5%. The key highlight, in Redeye's view, is the impressive growth in Subscriptions (+29% y/y and 3% above consensus estimates). The advertising market in India was unchanged in Q2.
Source: Truecaller
MAU grew at its fastest rate since 2018 with 14m added in Q2. DAUs was 325m (vs our estimate of 324m), corresponding to a DAU/MAU ratio of 82%.
User growth was good despite a moderate spend on user acquisition. Colombia and Nigeria grew their user bases by c40% y/y. Spend on user acquisition is expected to remain at the same level as in Q2 during H2.
Source: Truecaller
Recently, the implementation of a CNAP solution (basic presentation of who is calling) started in the Indian cities of Mumbai and Haryana. When asked in the conference call about this, Truecaller stated that it had so far not experienced any effect on user growth—especially considering the all-time-high user growth in Q2.
Ad revenues was SEK332m, -22% y/y. This decline was expected and a direct result of lower IPL revenues (SEK30m vs SEK115m in last year's Q2). Excluding this effect, ad revenues would have declined by 3% y/y.
CPM was SEK0.69, -46% y/y, and below our estimate of 0.83. This was, however, compensated by a high ad load of 16.2 Daily ad impressions per DAU (vs. est. 12.9). Combined, this means that quarterly ads ARPU have remained rather constant at SEK1.0 for the last four quarters.
Overall, we think the numbers are solid when taking into account the tough comps.
Source: Truecaller
Revenue was SEK64,4m, +29% y/y, +10% q/q, and above our estimates of SEK61m. Development on iOS remains strong and today accounts for 40% of Subscription revenues despite only 7% of total users. This thanks to 5x conversion rate and 80% higher price vs Android. Subscription revenues from the US was up by more than 65% y/y. Adoption of paid plans, as well as ARPU, both continue to increase, see below:
Later in this report, we will dig deeper into why we believe this part holds a bright future.
Revenue was SEK57.7m, +38% y/y and just above our estimates of SEK57m. Growth is driven by both verified business calls and the business messaging service.
In Q2, Truecaller raised prices, and expects to see a positive effect on ARPC over the coming year, i.e., when each customer renews its annual contract.
We have since long argued that Truecaller sits on significant untapped potential in its Premium offering, i.e., its Subscription revenues. This originates from the fact that as much as 18% of total revenues (in Q2) come from Subscriptions – despite a mere 0.7% of all daily active users having a paid plan. During Q2, Truecaller launched several features that could significantly increase the adoption of premium plans. Should this be the case, Truecaller is poised to deliver outstanding growth in its recurring revenues. This would imply that Truecaller would become a more predictable and resilient player even in a weak economy with low ad prices.
Towards the end of Q2, Truecaller announced that it would include insurance in the subscription at an unchanged price. The feature insures premium users in case of fraud in India for up to INR10,000 (cSEK1,300). While the amount may not seem big in the perspective of a Westerner at first glance, it is substantially worth more for the average Indian person.
Truecaller includes this in the existing Premium package with no change in prices, pays the premium to the insurance company, but bears no other responsibility towards either party.
Considering that it is Truecaller that pays the insurance premium, it is unsurprising that Truecaller raised prices for its premium plans earlier this year. As such, the price hike was likely a proactive measure to cover the cost.
The only risk Truecaller faces from including fraud insurance is if claims are higher than implied by the price paid for the insurance, in which case premiums will rise. However, this could very likely be mitigated by more price hikes of Truecaller Premium. Should the price hike required be so big that it would make up a significant part of the price for the premium plan, the feature could also be separated into its own plan.
Considering the magnitude of fraud in India, combined with the average subscriber paying less than SEK10 per month for this service, we think many Indians will now start considering the premium offering. Remember, moving the needle from a c0.5% adoption rate does not require that much. Seeing this in the light of fraud insurance possibly becoming a “need-to-have” feature, the chances of an upcoming significant uptick in premium adoption look promising.
Apple recently announced that it will be open to integration by third-party developers on iOS. Historically, Truecaller’s app has been limited on iOS due to UX constraints, particularly its inability to show names on incoming calls in real time. This limitation has made Truecaller’s value proposition on iOS less compelling compared to Android.
With Apple’s new changes, we understand that Truecaller will be able to integrate Live Caller ID (show names on incoming calls in real time) on iOS, potentially increasing its traction on the platform. Notably, iOS users are significantly more valuable compared to Android users, and this change could also help Truecaller expand in developed countries where the iPhone has greater market penetration.
Truecaller stated in the Q2 report that it expects the change to come at the end of 2024 or early 2025.
Following the Q2 report, we only make minor adjustments. Mainly, we raise our estimates for Subscriptions by c7% for 2024-2026e, while we reduce estimates for Ads by 3-6% for the same period. Combined with small downward adjustments on OPEX (-3% p.a.), our EBITDA estimates are lowered by 1-3%.
Truecaller: Estimate changes | |||||||||
2024e | 2025e | 2026e | |||||||
SEKm | New | Old | Change | New | Old | Change | New | Old | Change |
Ads | 1,333 | 1,363 | -2% | 1,659 | 1,759 | -6% | 2,058 | 2,131 | -3% |
Subscriptions | 263 | 249 | 6% | 330 | 309 | 7% | 389 | 363 | 7% |
TfB | 242 | 237 | 2% | 331 | 325 | 2% | 437 | 429 | 2% |
Other | 8 | 8 | 0% | 8 | 8 | 0% | 9 | 9 | 0% |
Revenues | 1,845 | 1,857 | -1% | 2,329 | 2,401 | -3% | 2,892 | 2,932 | -1% |
Growth YoY | 7% | 7% | -1pp | 26% | 29% | -3pp | 24% | 22% | 2pp |
COGS | -447 | -455 | -2% | -568 | -586 | -3% | -691 | -701 | -1% |
Gross profit | 1,398 | 1,402 | 0% | 1,761 | 1,815 | -3% | 2,201 | 2,231 | -1% |
Gross margin | 76% | 76% | 0pp | 76% | 76% | 0pp | 76% | 76% | 0pp |
OPEX | -730 | -735 | -1% | -827 | -852 | -3% | -1,012 | -1,026 | -1% |
EBITDA adjusted | 684 | 682 | 0% | 946 | 974 | -3% | 1,200 | 1,216 | -1% |
EBITDA adj margin | 37% | 37% | 0pp | 41% | 41% | 0pp | 42% | 41% | 0pp |
D&A | -52 | -52 | 0% | -42 | -43 | -3% | -43 | -44 | -1% |
EBIT | 632 | 630 | 0% | 904 | 931 | -3% | 1,157 | 1,173 | -1% |
EBIT margin | 34% | 34% | 0pp | 39% | 39% | 0pp | 40% | 40% | 0pp |
Net finance | 75 | 77 | -4% | 75 | 77 | -4% | 75 | 77 | -4% |
PTP | 706 | 707 | 0% | 978 | 1,009 | -3% | 1,232 | 1,250 | -1% |
Net income | 532 | 542 | -2% | 744 | 767 | -3% | 936 | 950 | -1% |
EPS | 1.5 | 1.6 | -1% | 2.1 | 2.2 | -2% | 2.7 | 2.7 | -1% |
EPS, diluted | 1.5 | 1.6 | -1% | 2.1 | 2.2 | -2% | 2.7 | 2.7 | -1% |
Rev growth + EBITDA margin | 44% | 44% | 0pp | 67% | 70% | -4% | 66% | 64% | 3% |
Ad revenue breAMdown | |||||||||
DAU | 329 | 328 | 0% | 368 | 367 | 0% | 407 | 406 | 0% |
CPM | 0.78 | 0.85 | -8% | 0.85 | 0.96 | -11% | 0.94 | 1.04 | -9% |
DAIDAU | 14.3 | 13.5 | 6% | 14.5 | 13.7 | 6% | 14.7 | 13.9 | 6% |
Truecaller: Income statement | |||||||||
SEKm | 2022 | 2023 | Q1 | Q2 | Q3e | Q4e | 2024e | 2025e | 2026e |
Ads | 1,489 | 1,346 | 318 | 332 | 332 | 351 | 1,333 | 1,659 | 2,058 |
Subscriptions | 171 | 206 | 58 | 64 | 68 | 73 | 263 | 330 | 389 |
TfB | 106 | 170 | 50 | 58 | 63 | 71 | 242 | 331 | 437 |
Other | 8 | 7 | 2 | 2 | 2 | 2 | 8 | 8 | 9 |
Revenues | 1,773 | 1,729 | 427 | 456 | 465 | 497 | 1,845 | 2,329 | 2,892 |
Growth YoY | 57% | -2% | 10% | -12% | 17% | 17% | 7% | 26% | 24% |
COGS | -418 | -421 | -104 | -112 | -112 | -119 | -447 | -568 | -691 |
Other external costs | -350 | -255 | -81 | -80 | -78 | -86 | -324 | -384 | -463 |
Personnel costs | -301 | -361 | -95 | -101 | -104 | -105 | -405 | -442 | -550 |
D&A | -29 | -45 | -13 | -13 | -13 | -13 | -52 | -42 | -43 |
Sum | -1,097 | -1,083 | -293 | -306 | -307 | -323 | -1,229 | -1,437 | -1,747 |
Gross profit | 1,355 | 1,308 | 323 | 344 | 354 | 377 | 1,398 | 1,761 | 2,201 |
Gross margin | 76% | 76% | 76% | 75% | 76% | 76% | 76% | 76% | 76% |
EBITDA adjusted | 734 | 703 | 151 | 165 | 172 | 196 | 684 | 946 | 1,200 |
EBITDA adj margin | 41% | 41% | 35% | 36% | 37% | 40% | 37% | 41% | 42% |
EBITDA | 717 | 703 | 151 | 165 | 172 | 196 | 684 | 946 | 1,200 |
EBITDA margin | 40% | 41% | 35% | 36% | 37% | 40% | 37% | 41% | 42% |
EBIT | 688 | 658 | 138 | 152 | 159 | 183 | 632 | 904 | 1,157 |
EBIT margin | 39% | 38% | 32% | 33% | 34% | 37% | 34% | 39% | 40% |
Net finance | 0 | 55 | 35 | 13 | 13 | 13 | 75 | 75 | 75 |
PTP | 688 | 712 | 174 | 165 | 172 | 196 | 706 | 978 | 1,232 |
Net income | 535 | 536 | 133 | 123 | 128 | 147 | 532 | 744 | 936 |
EPS | 1.43 | 1.41 | 0.38 | 0.36 | 0.37 | 0.42 | 1.53 | 2.14 | 2.70 |
EPS, diluted | 1.43 | 1.41 | 0.38 | 0.36 | 0.37 | 0.42 | 1.53 | 2.14 | 2.70 |
Base Case: SEK 55 | Bear Case: SEK 28 | Bull Case: SEK 90 | |||||||
2022-26e | 2026e-31e | 2022-34e | 2022-26e | 2026e-31e | 2022-34e | 2022-26e | 2026e-31e | 2022-34e | |
Sales CAGR | 19% | 20% | 16% | 4% | 8% | 5% | 19% | 20% | 16% |
EBIT CAGR | 24% | 23% | 18% | -4% | 10% | 3% | 24% | 23% | 18% |
Avg EBIT margin | 41% | 48% | 46% | 30% | 30% | 30% | 41% | 48% | 46% |
Terminal EBIT margin | 50% | 30% | 50% | ||||||
WACC | 11.0% | 11.0% | 11.0% |
People: 5
Truecaller, established in 2009, is still run by its two founders – Alan Mamedi as CEO and Nami Zarringhalam as CSO – who own ~15% of the capital but ~60% of the votes. The founders are, in our opinion, very passionate, have a visionary attitude towards the business’s opportunities, and have strong market insights. We assess that the management team is experienced and has good educational backgrounds and professional experience. The management team has, in our opinion, demonstrated significant execution capabilities, evidenced by the fast revenue growth and operating leverage in recent years (especially since 2020). Truecaller has a well-known owner base, consisting of several Venture Capital funds and Swedish institutional capital.
Business: 4
The business is asset-light and able to scale without expensive reinvestments. This scalability is further strengthened by strategic alliances (e.g., Alphabet/Android and CPaaS companies), which help drive new sales and a history of successful expansions into new markets. We think Truecaller operates in a highly profitable market environment (leading ad-platform businesses report 40%+ operating margins) and faces limited direct competition. Another positive, in our opinion, is that Truecaller has a strong value proposition and solves genuine customer needs. We think the company will remain competitive for a long time thanks to its significant, reinforcing network effects, which create high barriers to competing in core markets. However, we recognize a couple of important risks that could hamper future growth. This concerns the geographic concentration of revenues and users to India and a dependency on the Android platform.
Financials: 4
Truecaller has a strong cash position and very stable cash flows, which enables opportunistic M&A activities. The company has an impressive return on equity and invested capital and enjoys robust profit margins. We forecast meaningful revenue and EPS growth in the years to come. However, the company does not receive full marks as it lacks a long-enough track record of positive cash flows.
Income statement | |||
SEKm | 2023 | 2024e | 2025e |
Revenues | 1,740.5 | 1,856.9 | 2,340.4 |
Cost of Revenue | 421.2 | 447.5 | 568.1 |
Operating Expenses | 613.7 | 722.9 | 824.2 |
EBITDA | 702.9 | 683.9 | 945.5 |
Depreciation | 6.8 | 10.4 | 8.3 |
Amortizations | 9.0 | 31.3 | 25.0 |
EBIT | 657.7 | 631.7 | 903.8 |
Shares in Associates | 0.00 | 0.00 | 0.00 |
Interest Expenses | -39.4 | 0.00 | 0.00 |
Net Financial Items | 54.6 | 74.6 | 74.6 |
EBT | 712.3 | 706.3 | 978.4 |
Income Tax Expenses | 176.0 | 174.8 | 234.8 |
Net Income | 536.4 | 531.5 | 743.6 |
Balance sheet | |||
Assets | |||
Non-current assets | |||
SEKm | 2023 | 2024e | 2025e |
Property, Plant and Equipment (Net) | 18.4 | 13.4 | 12.1 |
Goodwill | 45.4 | 45.4 | 45.4 |
Intangible Assets | 25.0 | 2.9 | -10.5 |
Right-of-Use Assets | 118.8 | 108.4 | 100.0 |
Other Non-Current Assets | 94.2 | 94.2 | 94.2 |
Total Non-Current Assets | 301.7 | 264.3 | 241.2 |
Current assets | |||
SEKm | 2023 | 2024e | 2025e |
Inventories | 0.00 | 0.00 | 0.00 |
Accounts Receivable | 286.0 | 295.3 | 349.3 |
Other Current Assets | 0.00 | 0.00 | 0.00 |
Cash Equivalents | 1,572.6 | 2,132.3 | 2,844.9 |
Total Current Assets | 1,858.6 | 2,427.6 | 3,194.2 |
Total Assets | 2,160.3 | 2,691.8 | 3,435.4 |
Equity and Liabilities | |||
Equity | |||
SEKm | 2023 | 2024e | 2025e |
Non Controlling Interest | 0.00 | 0.00 | 0.00 |
Shareholder's Equity | 1,743.7 | 2,275.2 | 3,018.8 |
Non-current liabilities | |||
SEKm | 2023 | 2024e | 2025e |
Long Term Debt | 0.00 | 0.00 | 0.00 |
Long Term Lease Liabilities | 98.2 | 98.2 | 98.2 |
Other Non-Current Lease Liabilities | 54.5 | 54.5 | 54.5 |
Total Non-Current Liabilities | 152.7 | 152.7 | 152.7 |
Current liabilities | |||
SEKm | 2023 | 2024e | 2025e |
Short Term Debt | 0.00 | 0.00 | 0.00 |
Short Term Lease Liabilities | 22.8 | 22.8 | 22.8 |
Accounts Payable | 0.00 | 0.00 | 0.00 |
Other Current Liabilities | 241.2 | 241.2 | 241.2 |
Total Current Liabilities | 264.0 | 264.0 | 264.0 |
Total Liabilities and Equity | 2,160.3 | 2,691.8 | 3,435.4 |
Cash flow | |||
SEKm | 2023 | 2024e | 2025e |
Operating Cash Flow | 587.9 | 574.5 | 731.2 |
Investing Cash Flow | -93.3 | -14.8 | -18.6 |
Financing Cash Flow | -462.2 | 0.00 | 0.00 |
Disclosures and disclaimers
Contents
Investment thesis
Review of Q2: Strong growth in recurring revenues
Strongest user growth since IPO - Colombia and Nigeria stand out
Ads – Strong user growth, ARPU unchanged from previous quarters
Premium Subscriptions - Impressive growth
Truecaller for Business – Robust performance
Costs and margins – Lower gross margin but tight cost control
Outlook – Unchanged view on the ads market, but optimism around iOS, growth regions, and video ads
Strong earnings growth ahead driven by Premium adoption
New premium features set to improve premium adoption
Changes to financial estimates
Sales estimates
Fair value range
Quality Rating
Financials
Rating definitions
The team
Download article