Integrated Research Limited (IRI) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the 2020 Annual General Meeting of Integrated Research Limited. My name is Paul Brandling, and I'm Chairman of the company. To start proceedings, we acknowledge the traditional owners of the country from which we are presenting today, the Gadigal people of the Eora Nation. And recognize their continuing connection to land, waters and culture. We pay our respects to their elders past, present and emerging. The health and safety of our shareholders and our people is of paramount importance. In consideration of the potential health risk posed by the ongoing coronavirus pandemic and associated restrictions on public gatherings, we have elected to hold the AGM as a virtual event. Every effort has been made to ensure the meeting is delivered in a way that allows you, our shareholders, to participate. Today's meeting is being held online by the Lumi platform. This allows shareholders, proxies and guests to attend the meeting virtually. All attendees can watch a live webcast of the meeting. In addition, shareholders and proxies have the ability to ask questions and submit votes. Shareholders who are on the register at the 23rd of November are eligible to vote at this meeting. Questions can be submitted by shareholders and proxies at any time. To ask a question, press on the speech bubble icon. This will open a new screen. At the bottom of that screen, there is a section for you to type your question. Once you have finished typing, please hit the arrow symbol to send. Please note that while you can submit questions from now on, I will not address them until the relevant time in the meeting. Please also note that your questions may be moderated or if we receive multiple questions on 1 topic, amalgamated together to avoid repetition. If questions are lengthy, we may need to summarize them in the interest of time. Finally, due to time constraints, we may run out of time to answer all of your questions. If this happens, we will seek to answer them in due course post the meeting via e-mail. Voting today will be conducted by way of a poll on all items of business. In order to provide you with enough time to vote, I will shortly open voting for all resolutions. At that time, if you are eligible to vote at this meeting, a new polling icon will appear. Selecting this icon will bring up a list of resolutions and present you with voting options. To cast your vote, simply select one of the options. There is no need to hit submit or enter button as the vote is automatically recorded. You've the ability to change your vote up until the time the chair declares voting closed. I now declare voting open on all items of business. The polling icon will soon appear, please submit your votes at any time. I will give you a warning before I close voting at the end of the meeting. Thank you. We will now commence the proceedings. I have determined that a quorum is present, and as it is post 10 AM, I declare the meeting open. Once again, welcome to the 2020 Annual General Meeting of Integrated Research Limited. I am pleased to extend our welcome to all shareholders who are present online and also to guests representing brokers and analysts who are also present online. I would like to introduce my fellow directors who join me for this virtual meeting: Nick Abrahams; Peter Lloyd; Garry Dinnie; John Ruthven, CEO and Managing Director; Anne Myers; and also Peter Adams, our CFO; and David Purdue, the Company Secretary. I also welcome a representative from the company's auditors, Ernst & Young. The auditor is represented here today by Mr. Julian O'Brien, partner at Ernst & Young. And now to the formalities. A number of validly signed and completed proxies have been received by the secretary, and their voting on each resolution will be disclosed prior to the resolution being put to shareholders. I will now deal with the items of business in the order in which they appear in the 2020 AGM Notice of Meeting. For expediency, I will take the Notice of Meeting as read. I advise that the meetings of the previous AGM was signed as a true record at a subsequent meeting of directors. A copy of the 2019 AGM notes is with the company secretary. I table the following documents for consideration by members: financial statements, remuneration report, auditor's report, director statement and directors' report. These documents are available for inspection and are held by the company secretary. Presentations will now be given by myself, Peter Adams and John Ruthven. Questions will be addressed after all presentations have been given. I will now give the chair's address. I would like to start by acknowledging all of our shareholders. On behalf of the Board, thank you for your continued and valued support of IR. As we all know, 2020 has been a year of unparalleled disruption caused by the COVID-19 pandemic. Against this backdrop, it is pleasing to report that IR delivered record results. Your company achieved an increase of 10% in net profit after tax to $24.1 million, the seventh consecutive year of annual profit growth. Total revenue also grew by 10% to $110.9 million, and license fees grew by 15% to $72.1 million. Strong operational discipline and agility in responding to the rapidly evolving conditions driven by the pandemic is reflected in consistent margins. EBITDA margin measured as EBITDA over revenue was 39% and NPAT margin 22%. Total expenses for the year were up 7% to $78.2 million. The strong results are testament to the resilience of IR's business model with a geographically diversified Tier 1 customer base and revenues split across 3 primary product lines. Over 95% of the company's revenue was derived outside of Australia, highlighting the global profile of the business. Typically, multiyear contracts with our customers ensure our future revenue streams, and the stickiness of IR's solutions is evident with high retention rates. Expanding IR's footprint with existing customers is a key focus, and it was pleasing to note a renewal and extension license agreement with a long-term financial services customer resulting in the largest deal in IR's history at USD 10 million, which was signed in March. New business is an important part of IR's growth strategy and 38 new customers were added during the year, including major brands such as GlaxoSmithKline, Fannie Mae and Ricoh. IR's balance sheet remains strong with net cash of $4.7 million at June 30. Given the volatility of the macroeconomic environment, we thought it prudent to increase the company's debt facility, which now stands at $20 million. Peter Adams will cover the financial results in more detail shortly. The Board declared a final dividend of $0.0375 per share, taking the total dividend for the year to $0.0725, franked to 100%. Of course, these results were only made possible by people. And on behalf of the Board, I would like to acknowledge the contribution of our talented and dedicated team at IR under the leadership of John Ruthven. In my address last year, I commented on the importance of corporate culture and made the point that we are committed to ensuring the right values are clearly set, communicated and reinforced by walking the talk, plus both customer satisfaction and employee engagement measures are embedded in our reward frameworks. COVID-19 has impacted all of our lives personally and professionally, and has stress tested our global teams with respect to agility, adaptability and resilience. The safety and wellbeing of all employees is paramount and the workforce transitioned seamlessly to remote working back in March. Most currently still are working remotely, although we are reopening offices under strict health protocols to ensure a safe working environment. To date, 5 overseas employees have contracted the virus. I am pleased to report they are all recovering and there has been no workplace transmission. Management have implemented a comprehensive rolling program of enhanced virtual communications and support for all staff. This time last year, Australia was enduring the devastating bushfires. The global response was humbling. And the IR team played their part, raising more than $50,000 to aid the appeal as well as using a Hackday for the teams to focus on innovative solutions that could be used in the future to help manage crisis response. Through the company's Take2 volunteer program, IR employees dedicated time to a range of fantastic causes, including the Red Cross and Conservation Volunteers. There are other examples I could give, the point being that there is a sustained effort to support and unite individuals as a team in an environment where we strive to do the right thing. During the year, the company continued to strengthen its leadership capability and bench strength. The IR Leadership Impact program was launched, which is a strategic investment to develop, attract and retain talent. Pleasingly, the latest staff survey shows a sharp upward spike in employee engagement. A critical aspect of this is leadership trust, which is well placed in the upper quartile and positively reflects on the investment made in leadership development. There has been a focus on adapting to new ways of communicating with and supporting IR's customers across the world. Again, it is pleasing to report that customer satisfaction has significantly increased during FY '20 using the Net Promoter Score measure. For businesses, the global pandemic has created many changes and uncertainties which continue to evolve. IR is not immune to the macroeconomic environment, and we continue to remain vigilant and agile in our posture and responses. However, we believe that some of the structural changes in market dynamics such as the step change to remote working and cashless payments are an opportunity for the company. We continue to invest in research and development to accelerate innovation and expand IR's value proposition. Gross spending on R&D in FY '20 was $22.5 million, representing 20% of revenue, and a key achievement was the completion of a new SaaS platform, which will support the launch of new cloud-based UC and Payment solutions during FY '21. These are in addition to ongoing enhancements to IR's existing on-premise Prognosis solutions and represent an exciting inflection point for the company. The first of the new cloud-based products for Microsoft Teams environment was launched last month, and the next new product for Zoom environment will launch later this quarter. These new products provide IR with a unique proposition of supporting enterprise customers as they adjust to structural changes and typically embrace an environment of on-premise, hybrid and cloud solutions. As these new cloud-based products come on line, it means IR's business model will continue to evolve as increasing SaaS type revenue streams are on a subscription basis. Peter Adams will highlight how this works in his presentation. The company also continues to invest to drive internal innovation and operational effectiveness. An important investment was made this year to implement a new enterprise resource planning system. This project was successfully delivered and will enable operational efficiencies, improved business reporting and support for strategy and business planning as we position the company for future growth. This has been a particularly intense year for the Board and I would like to thank my fellow nonexecutive directors: Nick Abrahams, Garry Dinnie, Peter Lloyd and Anne Myers. In addition to their expertise, their commitment, collegiate support and counsel has been invaluable. After 6 years of service, Nick Abrahams has decided not to renominate and will retire by rotation at the conclusion of this AGM. Nick has made a tremendous contribution to IR. And on behalf of all of us, I'd like to acknowledge and wish him very best in future endeavors. As noted already, this is an exciting inflection point for IR, and the Board has spent considerable effort reviewing and identifying the appropriate skills and experience to enhance performance in our next phase. We are currently in the process of recruiting 2 nonexecutive directors, taking us to a total of 6, which will enable us not only to bolster relevant skills but to also provide more succession options for the future. We continue to focus on delivering compelling solutions for our customers and returns for our shareholders as well as being a great place to work for our employees. The company does not provide outlook guidance due to the lumpy nature of contracts, particularly towards the end of reporting periods. The CFO will comment on a trading update in his presentation today. I would stress the Board remains confident in the future for IR and our growth strategy. In concluding, I would like to specifically thank our customers for their trust in and support of IR. And again, on behalf of the Board, I thank our valued shareholders for your support. Thank you. And I now invite Peter Adams to present on IR's financial performance.

Thank you, Paul. As our Chairman just referenced in his opening address, the 2020 annual results set another record for IR. 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 given the deterioration in the macroeconomic environment in the fourth quarter. This result was driven by good growth in license sales of $72.1 million, up 15% over the prior year, together with a solid performance from professional services attaining $8.6 million in revenue, up 17%. Within the profit and loss 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 on the face of the P&L. We have been proactive in managing the business through the pandemic through the second half of FY '20 and continuing into the new financial year. Our objectives include maintaining our investment in development and protecting jobs, but also remaining prudent with OpEx spend. The increase in remote working and cashless transactions are positive tailwinds for us, and as a result, we have maintained a consistent approach to development. Return on equity for the year was 29%, down 2 points on the prior year. Operating cash flow was up 14% on a reported basis or 5% on a like-for-like basis over the prior year. As the Chairman referenced, total dividends of $0.0725 per share was consistent with the prior year and maintains our strong track record of return to shareholders. Turning now to the slide on revenue by geography. Asia Pacific revenue 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 offset by cyclical falls in Payments and Infrastructure. The region continues to develop their sales capability under new leadership. The Americas achieved revenue 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. The region continued to drive revenue in the fourth quarter despite the difficult macroeconomic environment caused by the pandemic. Turning now to the slide on revenue by product. 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 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 migration to Microsoft Teams. Payments revenues decreased by 14% over the prior year to $13.8 million. However, the compound annual growth rate across the last 5 years remains high at 22%, demonstrating the underlying trend remains 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 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. Let's now turn to the slide on subscription revenue. Currently, a large proportion of our business is reported in term license sales with upfront revenue recognition. As the business transitions to a subscription revenue model with the launch of our new cloud products, this pro forma presentation provides an alternate view of our overall financial performance using a subscription basis. The calculation of these numbers is based on amortizing the license fees over the term of the contract and adding recurring maintenance. Whilst the subscription equivalent revenue -- sorry, whilst these numbers do not form part of our statutory reporting, the pro forma subscription equivalent revenues shows Unified Communications growth of 11% over the prior year and Payments growth of 27%. We anticipate the analysis will become increasingly important as the business model continues to evolve, as I will now explain. So turning to the business model evolution slide. Cloud solutions are an important driver in our growth strategy to deliver excellent customer outcomes with high-quality recurring revenues. As we transition to SaaS with our new cloud and hybrid solutions, they will represent an increasing proportion of our overall revenue mix. Our revenue recognition policies for these 2 income streams remain consistent with our previous approach and are fully compliant with both Australian Accounting Standards and International Financial Reporting Standards. They are different though. As a reminder, revenue from license sales are recognized upfront at the commencement of the license term whereas SaaS-based revenues is recognized over time to correspond with the service delivery. The chart on the business evolution slide shows the revenue and cash flow streams comparing a hypothetical on-premise license contract and a hypothetical SaaS-based contract across a 6-year period. The assumption for the on-premise example, as represented by the bars, is a 3-year total contract value of $360 that renews for a further 3 years at the same price. The assumption for the SaaS example, as represented by the orange line, is $120 per annum over a 6-year period. The chart shows there is a timing difference in revenue recognition but the total cash flow is the same. The sum of the 3-year period and the 6-year period is the same between each hypothetical example. Of course, this is a simplified example to demonstrate the mechanical differences in accounting. In reality, there are other commercial differences that will play out over time. I wanted to take the time today to keep you up to speed with these changes. To facilitate your understanding of underlying performance, management will continue to report pro forma subscription revenues and introduce other key metrics as our SaaS business becomes more material. Now turning to the trading update slide. Although we are at an early stage in the new financial year, our revenue for the first 4 months of FY '21 are behind the prior corresponding period. With the ongoing global uncertainty around COVID and the election in the U.S., we are seeing our typical sales cycle lengthen and some customers deferring purchasing decisions. Whilst we do not provide guidance, I did want to help investors to understand our short-term outlook and the factors that influence our financial results. Our first half and full year FY '21 results will be influenced by the timing of deal closure and movements in currency exchange rates. Firstly, timing of deal closure. Historically, a large proportion of license sales close within the last few weeks of an interim and annual reporting period. The short-term timing issues around contract signings, taken together with current year-to-date trading performance, pose a degree of risk to our earnings in the first half. It should also be noted that license renewal cycle is typically weighted to the second half and with deferrals in purchasing decisions we are currently seeing, we expect the second half revenues to be larger than the first half. Now turning to currency exchange rates. With over 95% of IR's revenues derived outside of Australia, the volatility of currency exchange rates can significantly impact our results. For example, a $0.01 movement in the AUD/US exchange rate can affect revenue by over $1 million on an annualized basis. Year-to-date currency trends represent a headwind. In summary, the combination of temporary license sales and adverse FX movements means there is some risk that both revenue and profit for the first half may be below the corresponding period. We will have a more definitive view in January. Beyond this, we have a positive outlook. The recent release of new SaaS products is a key driver for future growth. We anticipate that SaaS bookings will build progressively over the remainder of FY '21 and will lead to meaningful revenue contributions in FY '22 and beyond. These new solutions come at a time when we see the market trends moving in our favor. This includes the increase in remote working and the increase in cashless transactions. Our CEO, John Ruthven, will provide more detail on how IR will benefit from these trends and expand on our key success drivers. Thank you.

Thank you. Thank you, Peter. Good morning, ladies and gentlemen. I'm pleased to be able to speak to you today, albeit virtually to share with you some of the insights of the company that we're building. As I reflect on my first year as CEO of Integrated Research, I'm pleased with what we've achieved for our customers, our employees and for you as our shareholders. I'm also excited about the future as we look to capitalize on the current market opportunities through accelerated innovation and improved execution across the business. Both Paul and Peter have covered adequately the performance of the business through the last fiscal year. I would like to focus on what we are building, the IR of the future. The key strategy that underpins our aspirations is one of accelerating innovation and driving long-term recurring revenues. There are 3 salient points of context in executing our strategy. First, the structural changes in the market that we've all experienced because of the pandemic. The overnight shift to remote working, with a strengthening view that this will have a permanent and lasting effect on the future of work and the acceleration of cashless or digital payments as consumers increase online purchasing and many vendors refuse to accept cash. Secondly, an acceleration in the shift of enterprise workloads to cloud infrastructures with a direct effect on both unified communications and payments. Critical to our strategy is the understanding that enterprises will not be on-premise or cloud, they will be both. Meaning hybrid environments, in which workloads run in both environments will be the norm for some time to come. In this space, IR has a unique competitive advantage. And third, increasing our share of wallet and winning new customers through expanding into adjacent areas in both collaboration and payments. In simple terms, this is bringing new products and capabilities to market to satisfy new and emerging customer requirements as well as extending our reach within our addressable market. We're coming from a position of strength as the leading global provider of experience and performance management solutions in the unified communications, payments and infrastructure domains. For over 30 years, we've built an enviable enterprise customer base that includes more than 25% of Fortune 500 companies and an extensive ecosystem of partners and service providers. This has been achieved by a team of people who have deep domain expertise, are loyal to the cause, led by a diverse and globally experienced leadership team. We're not naive about the challenges and uncertainties that the current market presents. In fact, we summarize them into this short phrase of short-term volatility and long-term growth. Understanding the market dynamics and flexing our innovation agenda to take advantage of 3 major structural changes is critical to our success. At our recent virtual global customer event, IR Connect 2020, we launched the rebrand of our key product lines: Collaborate, our former UC suite of products; Transact, our former payments suite of products; Infrastructure, remained as it was. This was to reflect the growth and relevance of our products and capabilities outside of those historic domains. In the Collaborate product line, the major market dynamic is the shift to remote working. It is estimated that over 500 million workers globally will be working remotely in calendar year 2021, representing about 25% of the global workforce, but most importantly, 40% of global knowledge workers. The real story here is not about an increase in overall UC end points, it is about the significant growth of conferencing users, which is up 48% in 2020 according to Gartner. Conferencing is most highly used by large organizations defined as greater than 1,000 staff and is now mission critical. It is complex because of the increase in multi-vendor solutions. These users are higher value, a sweet spot in the market for IR due to their sophisticated requirements. Cash was already in decline. The current market dynamic has accelerated this with a resultant jump in digital payments. Recently, Visa reported that their annual U.S. transaction volumes are up 30% for online transactions, excluding travel, whilst in-store is down 5%. Overall, whilst transaction volumes for 2020 are 8% higher than 2019, they are marginally down than prepandemic forecasts, with Capgemini revising their forecasts out to calendar year '23, down from 14% to 11.5%, still very healthy organic growth. The cloud or SaaS trend has accelerated, as evidenced by spend in this area forecast to increase nearly 19% CAGR out to 2024. It is projected that close to half of IT spending out to 2024 will be to the cloud -- will be the move to cloud. By way of example, a recent Ovum survey projects that 84% of banks are planning to move mission-critical systems to the cloud, and this sector is inherently conservative for obvious reasons. Against this backdrop, IR is ideally placed to accelerate our innovation agenda and reduce the time to market for our new products. We'll continue to spend around 20% of revenue on product and development over the next strategic planning horizon. Over the last year, we have done a lot of work to increase our fitness in both product management and development, focusing on value, velocity and quality. We've embedded an end-to-end innovation process from ideation to product release and ultimately customer feedback called IRIS. We have revamped our internal business case model to better prioritize spend in bringing new products to market. Our development shop has further embraced agile delivery and productivity gains -- or continues to improve, even whilst working remotely. Product quality, which is critical in supplying mission-critical software to some of the biggest global brands, continues to improve from already high standard. During the first half of FY '21, we'll deliver one of the richest sets of product releases in the company's history. We launched MS Teams, cloud and hybrid at our recent customer event, IR Connect 2020 as well as Prognosis Server 11.9 and the latest release of our cloud Transact product line, Payments Analytics. Still to come before the end of December is Zoom and simple switch integration, part of our agent infrastructure that is critical to extending our addressable market. In the pipe for the second half is Cisco WebEx, which will round out 3 of the biggest names in cloud collaboration platforms, Microsoft, Zoom and Cisco. In Transact, we will expand beyond card payments to real-time payments. There will also be enhancements in advanced troubleshooting for Collaborate, expansion of data sources for Payments Analytics and the ability for the platform to handle hybrid data in the cloud. Going further into the future, we'll continue to expand the number of UCaaS vendors we support, increase the richness of our analytics capability, deeper insights in the payments business and leverage machine learning at a platform level and create a cloud marketplace on our platform. This is a very exciting time and validation of the acceleration of our innovation agenda. Core to IR's value proposition is the simple phrase, mission-critical software sold to Tier 1 customers. This is what makes us sticky and what drives the high levels of recurring revenue, greater than 87% term recurring. As already referenced, over 25% of Fortune 500 companies are customers. And as you can see with brands like ANZ Bank, JPMorgan and Westpac, they are customers in 2 of our product lines. This speaks to the opportunity for cross-sell and upsell. Critical to our go to market are partners and service providers. As the slide shows, some of the biggest names are included here, names like NTT, formerly Dimension Data, embed our solutions in a managed service, that they on-sell to their customers. This is a one-to-many model that creates reach in our go-to-market. Across our 3 product lines, the market size is significant. It's also important to restate in simple terms, IR's sweet spot, summarized as real-time, high volume, high complexity. What this means is that the more complex customer use cases are, the more relevant or compelling our value proposition. We think of it as complexity simplified. The UC market size has traditionally been defined by end points, which is a useful proxy for users. This is becoming somewhat outdated as we address the higher value segments within the nearly 500 million users, the subsegment of conferencing users. They have more sophisticated requirements around the user experience, many of them now working remotely. We target enterprise customers, telcos and managed service providers. The Payments market for us is identified as noncash transactions, which is forecast to be over $750 billion for calendar year 2020. The sheer volume creates complexity, and IR provides banks, acquirers, processers, merchants and retailers the ability to manage transactions down to a root cause level, to either take proactive or remedial action to maintain the integrity of payment networks globally. IR's history goes back to the NonStop servers, which are used in a range of industries, including banks, health providers, telcos as high-availability platforms. There is a significant deployment of NonStop servers globally and our ability to optimize and support some of the world's most mission-critical applications running on these servers continues to be the cornerstone of our business. Going 1 level deeper into what IR does, I would like to share 3 case studies across our product lines. In the first half of last year, we signed an initial deal with GlaxoSmithKline, the large pharmaceutical company, to support and manage their video conferencing environment. In real time, we manage the user experience by providing real-time metrics for call quality, and in what was a classic land-and-expand engagement, we extended this initial deal in the second half of last year with an enterprise deal, providing GSK with a single pane of glass as part of their video transformation project. Woolworths, the large Australian grocery retailer, has over 45,000 lanes or checkouts across their network of stores. They have been an IR customer for over 10 years and last year extended the partnership for another 5 years. Our Transact product line is deployed to manage payment failures and declines as part of their customers' overall experience. We provide real-time performance metrics, visibility and tracking for the Woolworths operations team to manage their payment network from point-of-sale back to the switch. Our largest deal in FY '20 was with the large financial -- global financial services company, JPMorgan Chase. They have been a customer for over 25 years, and we extended the relationship for a further 5 years. Our solutions are deployed in the environment where they are processing thousands of transactions a second across their ATMs, merchant services, cards and retail. We manage the hardware and the payment applications that support these transactions, providing thresholds for standard operating and sending alerts when these thresholds are breached. As part of our ongoing transformation and our objective of being fitter, faster, stronger, we are very focused on the people that make it happen every day, the IR tribe. To modernize and make our values more relevant, we launched our Tribe Behaviors, which are values in action to create great. We were careful to express them in everyday terms so that they resonate. As we embed them as the core of our innovation culture, we want people to identify with them and personalize them. We used words and symbols to appeal to the different ways that people make sense of things. Ultimately, we used a language that people would adopt in their everyday interactions: team up or cooperate; be human, have a little sympathy -- empathy; own it, be accountable; crush it, ambition; have a laugh, don't take yourself too seriously. And as Paul already referenced, employee engagement and leadership trust are critical elements of our talent journey. We operate in highly competitive markets and the war for talent is real. Over the last year, we have reframed our approach to the people aspect of the company that we want to be by beginning the journey of moving from engagement to culture. We believe that culture trumps any measure of a high-performance organization. We are clear and purposeful on both our approach and the journey ahead. Core to our growth is the simple phrase: maintain the base, grow the base and add net new customers. In order to execute on this, there are 6 key success drivers. Market growth. We need to ride the organic growth in our respective markets. In Collaborate, it's the 48% growth in conferencing as a subsegment of the overall UC space, as per Gartner. In transact, it's the 11.5% growth in noncash payments projected by Capgemini. In infrastructure, we maintain our view that this market is broadly flat, but we need to hold our position and maximize margin. Secondly, expand our addressable market. This is to effectively compete to more of the addressable market in both UC and payments. In Collaborate, this has 2 vectors: new products for additional vendors, for example, Webex in the second half; new functionality for existing vendors, for example, direct routing. In transact, further enhancing our agent technology to integrate, to additional payments environments with the potential to more than double our market opportunity. The release of simple switch integration later this half is the first step. Thirdly, the move to cloud. As more enterprises move parts of their communications and payments infrastructure workloads to cloud, with Gartner projecting an acceleration in North America and Western Europe, we need to be successful on 2 fronts: protect the revenue base coming off on-premise, this is largely Cisco and Avaya; and leverage our hybrid competitive advantage to increase our share of wallet; hybrid and multi-vendor plays to IR's strength. Fourth, new products. We need to gain early traction with new products to increase share of wallet and acquire new customers. We also need to manage the revenue transition from upfront to subscription over the next 2 to 3 years, as already covered by Peter. The changes to the way we develop and sell SaaS should not be underestimated through the transition period. That said, we are well advanced in our planning for this phase. Fifth, new customers. Over the past couple of years, new customer acquisition has been trending up with 38 added in FY '20. The structural market changes of remote working and cashless payments are tailwinds to drive new customer adds, as is the increasing complexity of hybrid and multi-vendor customer environments. Increasing sales capacity is the sixth and final. As part of our ongoing transformation, we are reengineering the sales front end of our business. Already this year, we've assigned more head count to new business. We've added SDRs, or sales development reps, and moved our demand engine to 100% digital, partly in response to the pandemic. Managed service providers are an increasingly important part of our overall revenue mix, reaching a part of the market that we don't have the resources to cover. Importantly, our new cloud products are being developed from the ground up with suitability to this segment. In closing, I would like to again highlight our focus on driving sustainable long-term growth underpinned by recurring revenues. Our fundamental value proposition is sound, mission-critical software sold to an enterprise Tier 1 customer base, 87% of our revenues term-recurring and future growth leveraged to structural growth tailwinds. I would now like to pass back to our Chairman, Paul Brandling.

Thank you, John. The first item of business is consideration of the company's FY '20 financial statements and reports. There is no formal vote required on this item of business. I now invite shareholders to ask questions or may comment on the financial statements and reports and the operations and management of the company. David Purdue, Company Secretary, will act as moderator today.

Moderator, are there any questions on this item?

Yes, Mr. Chair. There are a number of questions. The first one is from the Australian Shareholders' Association, asking around the extended payment terms to clients, how are bad debts looking over the next year.

Thank you. I might pass that one to our CFO, Peter Adams.

Yes. Thanks, Paul. So extended payment terms are part of our business model. They've been part of our business model for several years. A review of the past end reports will show that bad debt write-offs have been quite minimal, in fact, less than 1% of revenue. And with regard to FY '21, from what we've seen today, we would see the story no different. So the reason for that is due to the quality of the customer base. We sell to large banks, financial institutions and other Tier 1 firms. And so that what gives us the confidence that bad debt write-offs will be relatively low. Thank you.

Are there any other questions?

Yes. Mr. Chair, we've got quite a few. So we've got another one from the Australian Shareholders' Association asking about -- stating that the pandemic might have served the company well. How do you view the future situation? And how are you taking advantage?

Okay. Thank you. Thanks for the question. Firstly, let me be appropriately sensitive to just a human aspect of all of this. Now who would have thought 12 months ago that we would see a global pandemic that just affected the entire world. And I'm sure for many, if not all of us on the call today, it would have touched us at a personal level, and some of that is very difficult. First and foremost, at IR, we decided that the health, safety and well-being of our staff is a key priority of paramount importance. So it's really pleasing to see that management was so fast out of the gates with a range of focused -- people-focused programs, which really seem to have worked very well. We're seeing from our staff surveys that morale is high. We see that productivity remains robust, and there has been no work-based transmission. So so far, so good. The question, obviously, is more about the business and looking forward. So let me address that. Firstly, and most importantly, we firmly believe that the structural changes in market dynamics are here to stay and that they represent incremental opportunities for IR. In the immediate term timing-wise, we see the timing has been disrupted by what's going on in this immediate period. And I'm really talking July up until now, where markets have been disrupted by the second lockdown, the extended uncertainty around the U.S. election and Brexit. And one of the things we've noted, as Peter mentioned, is some customers have slowed down their decision-making. We're not seeing deals lost or canceled per se, but velocity, in some cases, had slowed. Also, the currency is very volatile and continues to really bounce around very significantly day-to-day or most months per month. And that affects us, can be good, can be bad, depending which way it goes, but it makes predictability harder. IR traditionally does not issue guidance. And the reason for that is the profile of our business has always been large lumpy contracts back-ended reporting periods. And what we see is really a continuation of that same trend, just it's more pronounced in this current half year. Looking forward, which is where the question was really asking, we remain much more optimistic about full year and beyond. As I said, the structural changes in the market, we think really are additional opportunities for IR. We have doubled down on investing in R&D to accelerate our new products to market and bring with them the additional innovations and increase our value proposition to customers. So we remain very optimistic about driving sustained long-term growth. So the context is really some immediate-term '20 volatility, but confidence in sustained long-term growth. Having explained that context a little bit, maybe I'll pass to John Ruthven, just to ask him to sort of flush the story out a bit more to give you sort of the full picture.

Thank you, Paul. Certainly, as I reflect on the business impact, it's important, I think, that we take a balanced view. Peter referenced it in terms of headwinds and tailwinds. Currency volatility, certainly, and to the effect that the pandemic has an impact on that is hard to predict. But certainly, that's an aspect that we're carefully managing around or attempting to. In terms of -- Paul's already referenced, I would say that we see a more cautionary [indiscernible] from some of our customers. So additional steps in decision processes or lengthening of a particular sales cycle. But playing to our advantage, I think we've -- a business model, which has a very strong renewal space. We did message to the market at the commencement of this fiscal year when we announced earnings for last year that our renewals base or book of business, if you wanted to call it that, was more weighted to the second half and the flavor or the color of that renewals for this year is quite strongly UC or now our Collaborate product line. And the last point I would make, I think, from a timing standpoint, the release of our new cloud products and the fact that some of the trends I spoke in my address do play well in our favor as customers are now -- we looked at the initial onset of the pandemic back in the February-March time frame. We talked about 3 phases that we saw customers go through. Initially, when overnight, people had to work from home, companies largely did whatever they had to do to make sure that their infrastructure allowed their employees to connect. The second phase you might refer to as a hardening. So what they started to do then was say, well, looks like this is going to be around for a while. We need to improve. And so then they start to look at things like management tools to ensure that those environments were sound. And now we're seeing the third wave which is the innovation phase where companies are now dealing with higher order problems of remote working, for example, which is: a, it's likely these -- many of these changes have a permanent effect; secondly, organizations are now dealing with how do you manage productivity, employee engagement and all of these critical factors of business success when you've got a very large part of your workforce working remotely. So things like employee engagement, sentiment, et cetera, start to become, I think, a very important part of the future for organizations and they'll look to companies like us help them resolve that.

Thank you, John. Moderator?

Yes. Mr. Chairman, we've got a question from Mr. Shaun Burns. He -- the speech, generally, initially asking about with the trend of newer tech solutions to incumbent tech [ tones ], I think, such as IR. Specifically, if the move to Microsoft Teams opens the door for other technology, will IR face more competition or be displaced. He'd like some comments around that.

Right. I think IR -- where IR is just so excitingly well placed is we have unique differentiators in the market, and we think that the market dynamics will enhance the appeal of those differentiators. So for example, our customer base is typically the largest organizations around the world. Most of those type of customers have multiple environments, so they may have a Teams environment, they may have a Skype environment, they may have an Avaya environment in some countries, a Webex or whatever. But typically, very large organizations have multiple environments and also have a significant proportion of those solutions on on-premise platforms. As they will migrate over time into more of the applications being on cloud, we expect that to be a fairly long term and gradual phases is unlikely. We've seen from experience that those very large enterprises flick the switch off on it, everything they've got, and flick the switch on in something brand-new and very complex the next day. IR is the only organization that can take them on that journey. So we offer support for the on-premise world with our new products, we offer applications that suit their new cloud world. And most importantly as well, we offer them the ability to manage the hybrid environment as they transition across multiple domains. So we believe very firmly that actually this whole technology trend, we are significantly differentiated.

Mr. Chair, we have several questions from various shareholders talking -- speaking about the use of the virtual AGM this year and mentioning that a physical AGM is good for interaction between management and shareholders. And they're asking what are our plans in the future years, whether we will have a virtual or real AGM or hybrid AGM.

Okay. Thank you. So the thing is what we're planning to do vis-à-vis virtual AGMs and face-to-face in the future. Pretty easy from my point of view. I'm a people person. My natural default and preference is face-to-face. I think it's a healthy environment. Personally, I get more energy from that. The reality is we've had to do it this year this way because that's just circumstance. If we are -- we're able to, we will certainly be face-to-face next year. I would add, though, that the virtual environment has provided some advantages in that it is more inclusive in allowing shareholders to dial in who may not otherwise have been able to travel to where a face-to-face AGM is. So our default would be to go back to a face-to-face environment, further comments made in the question but we will also look to see if we can encompass some of the benefits, which may be picked up through a hybrid environment.

We've got a question from an organization called Ministry Proprietary Limited, talking about FY '19 payments revenue increased by 92% over the prior year, from $8.1 million to [indiscernible] and existing customers who renewed their [indiscernible] solution typically were happy to add capacity, additional modules and committed to license sales for a 3- to 5-year period. In FY '20, payments declined by 14% and it was noted the underlying base was growing, as evidenced by the subscription slide. If the underlying base is growing, then why is payments revenue declining in FY '20?

Yes. So if you look at the long-term trend, you can see payments continues to grow at a nice annualized CAGR. In the prior year, we had one particular large deal. That was an outlier that spiked our payments revenue outside of the normal growth curve. So once you normalize that, our payments trend is still very positive.

We've got a question from Ms. Mary Curran. With the 20% revenue spend on R&D, which is the main focus -- which is the main focus, land and expand, contract expansion or contract extension?

That's a balance, but I think I'll pass that one to our CEO, who's right at the operational interface.

Thank you. Thanks for the question, Mary. I'd just reflect on the -- one of my slides, the statement I made around our business model has got a fairly simple basis, which is around maintain the base, grow the base and add net new customers. So -- and I also referenced the changes we've made around our business case -- internal business cases and the IRIS process. So of the 20% spend, we are looking to try and move more of it to focus on new capabilities, net new products that existing customers can purchase as well as adding net new customers. But we're also very, very aware that we've got a very strong customer base, and we need to have a balance of maintaining the base to ensure that the platform, prognosis, et cetera, remains current and of high-quality and high performance. And then also being able to participate in the market in terms of the natural growth drivers, which we refer to as organic growth, and that was the 11.5% in transaction volumes increases forecast by Capgemini's World Payment Report as well as the significant growth that we've seen in conferencing users in the UC or Collaborate space. So it's -- the short answer is it's a balance.

Okay. There are 2 questions from Mr. Salem. First of all, he's asking if there is -- with the increasing trends of trade receivables in past years, is there a risk management over that? And then he's asked the second question around the use of borrowings and is the company proposal to use borrowings in the future as opposed to being [indiscernible].

Okay. So both of them are financial, and I'll pass them over to our CFO, Peter Adams.

Great. Thank you. So the first question on accounts receivable or trade debtors. We maintain a substantial approach to managing our debtors. So going through the aging and going through a process of creating dashboards within our workplace to collect debts. As per the previous comment I made on trade debtors, our exposure to bad and doubtful debt has been relatively minimal in the past. And there's no change going forward. And we anticipate that, that will continue. The increase in trade receivables in the aggregate is a function of the growing business and the waiting toward more deferred payment plans. The next question was on the use of debt. As the Chairman spoke before, we've doubled our debt facility from $10 million to $20 million. In the past, we've used that debt facility to manage our working capital flows because if there are ebbs and flows with regards to that working capital. And we'll continue to use that facility into future periods as driven by the cash flow of the business.

Have another question from a shareholder at Ministry Proprietary Limited, referring to the 2020 annual financial results presentation and customer satisfaction increasing by 25%. And they're asking what is the base from which the annual improvement of 25% mean.

Okay. I'll ask our CEO to make comment on that.

Thanks, Paul. We would regard the actual -- so it's measured on a Net Promoter Score, or NPS, basis. And we would regard that as company-sensitive data. So the reason that we shared this percent increase with the market was simply to give a good indication that as we're continuing to maintain the base of our customers and grow that we are doing a good job of ensuring that the customers that we have can be retained. And of course, that's a significant input to the high recurring revenues, which we've already referenced is 87% term-recurring.