Integrated Research Limited (IRI) Earnings Call Transcript & Summary

Good morning, and welcome to the FY '20 Results Briefing for Integrated Research. My name is John Ruthven, and I'm the CEO of IR. With me today is Peter Adams, our Chief Financial Officer. This morning, we posted our results presentation to the ASX website, which we will be talking to during this call. The agenda for today's call is, first, a summary overview of the results and operational milestones and then Peter will take you through a detailed analysis of our financial results for FY '20. We'll close out the session with a look at the key growth drivers going into FY '21 and finally, take some of your questions. Before we get into the detail, let me highlight the 3 key points for today. Firstly, we are pleased to deliver record results. Revenue and net profit are both up 10%. We are working well remotely and continue to prioritize our employees' welfare and deliver great solutions for clients. Second, IR is a strong business. We have an excellent base of loyal Tier 1 customers and around 87% of our revenues recur. Thirdly, we're executing our growth strategy well. We're winning new customers and launching new products such as Teams and Zoom in the next months. Our addressable market is large and importantly, expanding with the step change in remote-based working and cashless payments. We are well placed to fully capitalize on these tailwinds. Please move to Slide 2. IR is the leading global provider of performance and experience management solutions to Unified Communications, Payments and Infrastructure. We have an extensive enterprise customer base that includes more than 25% of the Fortune 500 companies with a history of creating value through our deep domain knowledge to optimize operations of mission-critical systems. As the graph on the left shows, we have a strong track record of revenue growth over the last 7 years, delivering 11% CAGR over this period. For the year just completed, we have again delivered double-digit revenue growth over the prior year. Our business model is strong with high-quality revenues generated from providing mission-critical software to a Tier 1 customer base, growth driven by a structural change in the market with remote working, cashless transactions and the shift to cloud. More than 87% of revenue recurs on multiyear contracts. We are a defensive proposition and a strong track record of financial performance, 40% EBITDA margins, circa 30% return on equity and net cash to fund future growth. Moving to Slide 3. We've delivered another record year -- revenue and net profit after tax result for FY '20. Revenue for the year was $110.9 million, up 10% over the prior year. NPAT was also up 10% over the prior year to $24.1 million and was a strong result in the current macroeconomic environment. This result was driven by strong growth in license sales of $72.1 million, up 15% over the prior year, together with a good performance from Professional Services, attaining $8.6 million in revenue, up 17%. The quality of these earnings remain strong, with the recurring revenue portion at 87% and maintenance retention at 93%. Operating cash flow was up 14% on a reported basis or 5% on a like-for-like basis over the prior year. The Board of Directors have declared a final fully franked dividend of $0.0375 per share, taking total dividend for the year to $0.0725, continuing the strong track record of returns to shareholders. Peter will shortly talk through the details and mechanics of these results. These strong results have been achieved at a time that we are making strategic investments to drive long-term sustainable growth. As I move to Slide 4, I reflect on FY '20 as a year in which the company increased our leverage to long-term growth trends. Supporting this perspective are some of our key achievements. Revenue and profit are up 10%, while license sales were up 15%. Our continued customer focus resulted in customer SAT being up 25%, and we closed the 2 biggest deals in the company's history, proving we can execute high-value transactions. We added 38 new customers, including names like Fannie Mae, Ricoh and GSK or GlaxoSmithKline. Our innovation agenda was fueled by structural changes in the market with an explosion in remote working and a shift to cashless transactions. We went live with our new SaaS platform, validated our hybrid strategy as our enterprise customers leveraged hybrid cloud. And we reprioritized our product road map so that we can launch MS Teams and Zoom products in this current half. We again invested 20% of revenue on R&D. Engagement of our people increased throughout the year as we made key new hires, including a new regional leader for the Americas, a Global Head of Professional Services, and a new Chief Information and Security Officer or CISO. We strengthened our approach to career pathing with internal promotions and simplified our organizational structure for better alignment. Leveraging the structural changes in the market already referenced, our strategic focus intensified on our Unified Communications and Payment product lines. Company-wide, we launched a transformation program to strengthen the core of our business over the next few years to make the company fitter, faster, stronger. As part of this, we invested in our product and R&D areas to better align to value, velocity and quality with the objective of high-quality products and reduced time to market. I'm now on Slide 5. Our primary focus is the health and well-being of our employees and their families. We have adapted to the new way of working, and since March, the vast majority of our teams have been productively working from home. This also reflects the working environment for most of our customers. We've responded by leveraging digital channels to maintain our close connection and engagement with them. We're taking the approach of getting on with it and continuing to deliver for our customers, albeit remotely. Moving to Slide 6. There's really no better validation of a strategy being executed than real examples. We've previously talked about the mission-critical nature of our software, the fact that it is sticky and of a recurring nature. Leveraging this position, we think of growth in 3 very simple ways: maintain the base; grow the base; and add net new customers. Core to our customer value proposition is helping them make sense of large-scale, data-intense operational environments or complexity simplified. I'd like to share 3 customer examples to help explain what IR does. Woolworths, the large Australian grocery retailer, with over 45,000 lanes or checkouts, have been a customer for over 10 years. They extended their contract with IR for another 5 years for real-time tracking and performance metrics of their payment environment. As you can imagine, being able to get to the root cause of a credit card payment decline or failure, in real time, amongst thousands of transactions, is a little like finding a needle in the haystack, yet it is critical for the customer experience and revenue assurance for Woolworths. As announced to the market in March, we closed a very significant contract with JPMorgan Chase, the large financial services company. They've been a customer for over 25 years, and this is both an expansion and extension of the contract. Across their mission-critical environment that supports their ATM networks, payments and other critical workloads, we manage their hardware and payment applications. We provide insight to the bank when these operational environments are outside of standard operating performance so that proactive and corrective action can be taken. Last earnings, we shared a new customer win with GSK or GlaxoSmithKline, the large global pharmaceutical company. In a textbook land and expand, we leveraged the initial deal to extend the footprint for managing the user experience on their videoconferencing platform. You can imagine with the step change to remote working that the criticality of this has been amplified. We provide the operational teams who support these platforms with real-time metrics to understand call quality, proactively identify issues before they impact calls and manage incidents impacting users to assure the user experience. Moving to Slide 7. Core to the value of IR is the blue-chip customer base and the quality of the revenue base, validated by the recurring nature of these revenues at greater than 87%. At the same time, this high-quality customer base continues to grow with the addition of 38 new customers, some of who you can see highlighted on the slide. Importantly, IR has a proven track record of being able to execute high-value transactions with large enterprise customers. In the last year, we closed deals greater than $3 million in total contract value with JPMorgan Chase, NTT and Fiserv. I would now like to hand over to Peter, who will provide a detailed insight into our financial performance.

Thanks, John. We are on Slide 8, showing our revenue by geography. Asia Pacific revenues grew 17% over the prior year to $17.7 million and represents 7 years of consecutive growth with a compound annual growth rate of 13% across this period. The region achieved growth across all product lines with a combination of renewals, capacity sales and new business. Europe revenues were broadly flat with the prior year at GBP 9.2 million. The region achieved license sales growth over the prior year in Unified Communications, which was partially offset by cyclical falls in Payments and Infrastructure. The region continues to develop their sales capabilities under new leadership. The Americas achieved revenues of USD 50.3 million for the year. Momentum improved in the second half, with license fees up 35% and growth across all product lines. Importantly, the region continued to drive revenue in the fourth quarter, despite the difficult macroeconomic environment caused by the pandemic. Turning to Slide 9. Unified Communications revenue grew 17% over the prior year to $59.8 million with growth sourced through a strong renewal cycle attached with additional capacity sales on both the Cisco and Avaya platforms. New business license sales of $5.8 million was achieved for the year with 29 new customers added to the fold. License sales to Microsoft Skype for Business customers was down against the prior year, with further customer migrations to Microsoft Teams. Payment revenues decreased by 14% over the prior year to $13.8 million. However, the 5-year compound annual growth rate across the last 5 years remains high at 22%, demonstrating the underlying trends remain on a growth trajectory. There were 9 new customers added over the year, facilitating an increase in the baseline for future growth. Existing customers who renewed their Prognosis solution typically added capacity and/or additional modules, demonstrating their commitment to the product. Infrastructure revenues increased by 9% to $28.7 million and was underpinned by the large JPMorgan transaction closed in March. Slide 10 provides our revenue numbers on a restated subscription basis. This pro forma presentation serves the purpose of displaying our results on a subscription basis to demonstrate the underlying growth of the business. The calculation of these numbers is based on amortizing license fees over the term of the contract and adding recurring maintenance. Whilst these numbers do not form part of statutory reporting, the pro forma subscription equivalent revenues shows Unified Communications growth of 11% over the prior year and Payments growth of 27%. Subscription recurring revenues represents more than 80% of total pro forma revenue. A full reconciliation of the pro forma subscription numbers can be found in the appendix to this presentation. Slide 11 presents the company's profit results and margin achievement. The bottom line profit achievement was growth of 10% to $24.1 million on revenue of $110.9 million. Within the result, there were plus and minus factors, but importantly, the result delivered growth on a consistent profit margin compared to the previous years. The company benefited from a lower effective tax rate but was somewhat offset by unrealized exchange losses captured in other losses in the P&L. As John referenced earlier, we have been proactive in managing the business through the pandemic. Our objectives, including maintaining our investment in development and protecting jobs, but also remaining prudent with our OpEx spend as we monitor the situation. The increase in remote working and cashless transactions provide an opportunity for us. And as a result, we will continue to invest in development over the coming year. Turning to Slide 12 on cash flow. We generated over $30 million in cash from operations. There was some delay in cash receipts during the fourth quarter and consequentially, we drew down on the debt facility. Pleasingly, there has been a rebound in cash receipts early in the new financial year. With approximately 70% of overdue debts paid, there is more work to do. A large part of the dev spend has been on our Prognosis next-gen platform with first SaaS bookings from new product launches expected in FY '21. The company's balance sheet, shown on Slide 13, remains in a solid position with net cash of $4.7 million. Our trade receivables balance of $87 million is a strong source of future cash flow. The company's risk exposure is heavily weighted toward financial institutions. And the long-term record of historic bad debt write-offs have been minimal. The introduction of the new accounting standard on leases has led to a gross up of assets and liabilities onto the balance sheet. In summary, the balance sheet remains strong and is well positioned to fund growth. With that, I would like to pass back to John, who will take you through the rest of the presentation.

Thanks, Peter. Now on Slide 14. I referenced earlier the fitter, faster, stronger transformation effort within the company, with one of the key pillars being accelerating innovation and reducing time to market. As we continue to invest 20% of revenue on R&D, we have refreshed our product and development strategy with a focus on value, velocity and quality or VVQ. Core to our growth is maintaining the strength of our enterprise customer base, whilst leveraging structural growth opportunities in the market. To do this, we are deliberate about balancing our investment between maintaining our core products that drive greater than 87% recurring revenue and bringing new SaaS products to market. We're improving our capability and will bring hybrid cloud, MS Teams and Zoom products to market this half. To maintain our competitive advantage, we need a highly efficient development shop. We've implemented a new end-to-end innovation process and enhanced our leverage of agile processes. Our SaaS platform runs on AWS, and we continue to mature the platform architecture, leveraging the latest technologies and services. Our skills and capabilities are constantly improving as we extend our SaaS platform and reduce time to market for new products. For over 30 years, we have served enterprise-grade customers, supporting their mission-critical environments. Ensuring that our products are robust and reliable is critical to delivering on the customer promise. This is something that we do very well, with over 95% satisfaction measured at the point of support case closure as well as a decreasing support backlog. Slide 15 highlights the dynamics of the ongoing change as enterprises make strategic decisions on where to run critical workloads, on-premise, hybrid or cloud. We are committed to supporting our customers across all 3 of these environments and critically, our product strategy is aligned to this. We have a strong point of view that the enterprise customer world is not going 100% cloud in the near term. As the quote from Aberdeen Group highlights on this page, there is evidence that in some cases, customers are, in fact, boosting on-premise workloads. In simple terms, hybrid means that a workload is run across a combination of on-premise and SaaS environments. Our new SaaS platform went live in December, and we are in a thorough beta testing phase with a number of large enterprise customers. The platform is designed to support both UC and Payments product lines. It's a highly scalable, extensible platform designed with a common services layer and a data layer to ingest, transform, analyze and store large amounts of complex data. The products or applications that run on top of it are tailored to specific use cases like analytics, troubleshooting or support for specific collaboration platforms like Teams and Zoom. Proof of its capability is that in the beta phase, we are currently supporting over 300,000 users, generating call-related data from more than 540,000 daily calls. Leveraging the step change in the market with remote working, we're launching SaaS and hybrid products in this half to support MS Teams and Zoom. Since early March, daily active users on MS Teams have grown to greater than 75 million, and Zoom subscribers have more than tripled. Zoom's enterprise customer numbers are also up 90%. We have been part of Microsoft's beta program for their Teams API, which has allowed us to accelerate the development of this product. In simple terms, our products will use API integration to Microsoft Teams, Zoom and other collaboration platforms to support operations teams managing the user experience. Importantly, we will support hybrid environments, meaning customers that are running highly complex, large-scale UC or collaboration environments made up of an on-premise infrastructure from the likes of Cisco and Avaya combined with MS Teams, Zoom, Webex and others. Now moving on to Slide 16. We are really clear on what is driving our market opportunity and the tailwind that the step change in remote working and cashless transactions provides. We're also clear on what we need to do to execute on this opportunity. The UC market has dramatically increased in size, complexity and criticality driven by remote working. We have a strong renewal space and new products launching in both SaaS and hybrid to capitalize on this opportunity. The payments market has been significantly disrupted by the acceleration away from cash. We will expand our addressable market through development of simple switch integration to a broader set of payment switches and technologies as well as new SaaS products. Across our 3 regions, we expect to see continued growth in APAC, leveraging new products and customer demand. We are confident that the Americas has turned the corner with a solid pipeline in front of them and improved conversion rates. The European business stabilized in FY '20 with a good performance in UC. And coming into FY '21, pipeline is up significantly, and we have invested in additional new business and business development headcount for FY '21. New customer acquisition is trending up and with solid new business pipeline and new products coming to market, we expect this momentum to continue. We have made go-to-market model changes again this year to improve our ability to execute in this area. We continue to get market reach through our growth with managed service providers who bundle our products into their overall service and reach market segments that we are not able to. We have talked a lot today about our focus and investment in innovation and R&D. With our SaaS platform live and supporting high-volume beta customers, we will accelerate bringing new products to market, with MS Teams, SaaS and hybrid and Zoom planned for this half as well as payment analytics. We're continuing to invest and extend the platform and have the competitive advantage of being able to support customers with solutions on-premise, hybrid and SaaS. Let's now move to Slide 17 to wrap up with some concluding remarks. We're pleased to deliver a solid result in FY '20. I'm not going to overstate COVID-19. At IR, it's business as usual, albeit by working remotely. Our growth outlook assumes the current macro environment remains consistent with no further material deterioration as a result of the pandemic. We continue to focus on delivering solutions for clients. We're getting the job done. And we are executing on our growth strategies to increase our exposure to the long-term structural trends of remote-based working and cashless payments. We have new products to drive growth and a more productive development program to deliver high-quality, new products to market more quickly. Everyone at IR knows exactly what we have to do to win. It's a fair question to ask though, what are we building at IR? What sort of company do we want to be over time? This slide lays out our goals. First, we want to build a strong business. That means high levels of recurring revenues through this cycle. That strength comes from providing high-quality, mission-critical solutions to top-tier clients. They rely on us. This trust drives enduring long-term relationships with high levels of retention. Second, we want to grow IR. We're a growth business. We operate in large global markets with scope for sustained growth. We have excellent solutions that are timely and very competitive. We can continue to grow our customer base and drive revenue per customer up, too. Our addressable markets are expanding with the step change to remote-based working and cashless payments. Our plan is to fully capitalize on these tailwinds. And finally, we want to deliver strong returns for shareholders. We have increased revenues by 11% CAGR since 2013. We can self-fund our growth investments and reward shareholders with dividends. On that, we will now turn it over to the moderator to take questions.

[Operator Instructions] Our first question comes from the line of Chris Savage with Bell Potter.

A general type question to begin with. Can you give us an idea how you fared in Q4 when, obviously, COVID was hitting? Like, did deals get delayed? Did you hit your budgets? Did the typical sales come through late in June? Can you just walk us through what the customer reaction was?

Yes. Good question. So the shape of the quarter, and I think Peter referenced it in his comments, was that we did have a slight slowing in Q4. The shape of the quarter was no different in the sense of a lot of the business coming in the final month of the quarter. But the pleasing thing, and this is across all 3 of our regions, our conversion rates, which is a pretty key indicator for sales execution, improved across all 3 regions. And we also successfully built more pipeline. So we've come into FY '21 with more pipeline than we entered FY '20. So good efforts from the likes of our sales development and marketing teams who have our top-of-funnel responsibility and, during the course of the half, had to literally convert from about a 50-50 balance between events and digital channels to 100% digital. And then the last comment I'd make, Chris, is we did see some customer behavior where they would, in some cases, sign a shorter-term contract. And in some cases, new projects were postponed or deferred. So it's easy for a customer to say, well, with uncertainty, we could maybe just postpone that.

Okay. And you made that point about the pipeline being better entering FY '21 than FY '20. Is that from a combination of factors? Is that because some deals got delayed in Q4? Is it because just the natural renewal cycle? Or is it also your sales team just doing a better job with leads? Or all of the above?

Yes. Sales execution in the close was really, really good this year. So we actually only saw a small number of deals that pushed outside the close of the year, so we didn't really get a pipeline benefit from deals moving out. So the building pipeline is really credit to the sales teams combined with our marketing teams in terms of really -- and when we pivoted to 100% digital, it wasn't a massive change in the sense that over the last couple of years, we've actually built a pretty strong foundation inside the company of that inside capability. So when we simply had to put the burners on to go 100% on it, we were ready to do that. And importantly, in FY '21, I referenced in some of my comments, particularly in the U.S. and Europe, we've made further investments in sales development and business development capability to really focus on new business.

And what is the renewal pipeline like for this year?

I might ask Peter to add to that. But I mean the opening comment I'd say is the renewal pipeline is reasonably solid. It is weighted to the second half. Peter, did you want to comment further?

Sure. Yes. I think in terms of the color of the renewals, clearly, after having another good year with Infrastructure, Infrastructure renewals will be down in FY '21. But the renewals pipeline for Unified Communications is strong and Payments is okay as well. But with UC, I think that's where we'll see the growth.

Okay. And slight change in tack here, but M&A, is that at all on the radar or you've got enough on your plate?

From a strategy perspective, M&A is very clearly part of our strategic options. And the Strategy Committee and the Board have continued to endorse that in terms of where it makes sense. That said, we do not have a near-term acquisition in our back pocket ready to execute per se, but in terms of our growth strategy, we consider M&A as a viable part of that overall mix.

And last question. It kind of comes full circle back almost to the start. Customer behavior this quarter, have you seen any notable change from last quarter? And are they screaming out for Teams and Zoom-type product?

Yes. I mean our decision to -- and I think, Chris, in our half 1 earnings, we shared this as well. We did do some, what we called internally, some strategy sprints when the change in macroeconomic environment came along to see whether we should reprioritize our road map. And some of those decisions were to accelerate our work around MS Teams and Zoom. And obviously, those decisions were driven by customer demand. I think on the MS Teams side, it's pretty obvious to the enterprise world that major customers are moving rapidly off either their Skype environment, et cetera, to Teams, which is borne out by the numbers. I think I referenced subscribers or daily users on Teams is about greater than 75 million. And Zoom, although it started from a very strong consumer base, their enterprise side is up significantly. And if you look at some of the big service providers, they are building out Zoom practices. So it's very clear to us that, strategically, Zoom is a very important part of the overall mosaic of Unified Communications.

[Operator Instructions] Our next question comes from the line of [ Chris Silva ], private investor.

John, Peter, congratulations on the results. Just a couple of questions. A couple of questions. So regarding contract renewals, are you finding that you're able to sort of increase the price given the criticality of your products and the businesses?

I wouldn't reflect on increasing the price. But I think in terms of what I would term price realization, we have reasonable leverage, at the same time, striking a balance between doing the right thing with very long-standing customers. A couple of the examples we shared today being Woolworths, more than 10 years; JPMC, greater than 25 years. I do believe that there is an opportunity for us around price realization, but I don't believe it's any significant. I think we can add a few points to it. It's not something that by changing our discipline or approach there, that we would significantly change our revenue shape.

Yes. Okay. Sure. Makes sense. And the other question, just something actually from the last half I'd like to pick up. Just the cancellation of the FedRAMP contract with Cisco, I know overall, over the years, it's been quite slow and not really forecast in your numbers. But I think I understand it could be a potential earner. I just want to understand sort of what the background is for the cancellation. And are you sort of still working on restoring that contract to sort of get on board the FedRAMP bandwagon, as you know?

We're not looking at restoring that contract per se. But if you look at it in terms of the end-user customer being the federal government in the U.S., we certainly, through other aspects of our go-to-market, are actively pursuing opportunities with the federal government. And Cisco was with FedRAMP -- sorry, was -- FedRAMP was through Cisco. There are numerous other service providers who also have similar agreements with the federal government. The reason that the contract was slowing in terms of getting traction was simply driven by the federal government in the U.S., their takeup of cloud or SaaS-based solutions, which was a lot slower than anticipated. I think -- and this is a speculative comment, but obviously, with the changes in remote working, et cetera, that may, and I stress may, be an impetus for that to turn around.

Our next question comes from the line of Mike Ryan with Select Equities.

John, Peter, the JPMorgan Chase contract, which was essentially Infrastructure and Payments, I was just trying to look at the numbers there and try and figure out sort where it's all gone. Can you walk us through where the $10 million is and how you account for it?

If that's okay, yes, a question for Peter.

Yes. Thanks, Mike, for your question. So yes, as you're aware, we disclosed the $10 million contract in March. And the color of that was it's a 5-year deal. And firstly, with regard to our revenue recognition model, the license component is recognized upfront, and the maintenance is recognized ratably across the 5-year period. So without sort of going into the mechanics of all the detail, you could ascribe circa 80% of that deal to license fees, and all of it is located in the Americas. And in terms of the proportion of Infrastructure and Payments, I think predominantly, a lot of it is actually Infrastructure, and then there's a smaller element that is actually Payments.

Okay. Great. You've got a pretty good client base there. How have you gone sort of trying to reproduce the JPMorgan Chase deal with other customers?

I mean, I referenced, I think one of the things that we did very well this year was sales execution. It's a hard thing to put a rating on though, but I think our sales execution was very good, particularly in the second half of the year. We executed a number of large deals this year, and there's a certain skill in a sales organization to be able to execute on high-value transactions. Our customer base is such that, particularly with those customers that have been with us for a long time and have an extensive use of our product, there is the opportunity to continue to develop and build out large contracts. I don't have another JPMC in my back pocket, but certainly, our customer base gives us the opportunity to build multimillion-dollar deals.

[Operator Instructions] Thank you, ladies and gentlemen. That concludes our time allowed for questions. I'll turn the floor back to Mr. Ruthven for any final comments.

Thanks, Melissa. And thank you, everyone, for joining the call today. I think the key messages that I'd like to leave with you are we're very pleased as a company, and certainly the Board endorsed their support of the very strong and record results that we've delivered in both revenue and profit, despite the circumstances that we're working in remotely. We continue to prioritize the health and well-being of our staff and to continue to deliver good results and outcomes for our customers. Key to that is that IR is a very strong business. We've got an excellent loyal customer base, Tier 1 customers. And with that, a high percentage of our revenues recur, which is a very, very strong element to a business in these times. And overall, I've referenced several times today around sales execution, et cetera. We're executing well against our strategy. We're cautious about some aspects of the outlook. We're excited about the new products that we're bringing to market, particularly in the SaaS arena. And we believe that our addressable market and market opportunity continues to grow. And so with that, we're looking to capitalize on the market dynamics that are at play. With that, again, I'd like to thank you all for joining our earnings call today.