Integrated Research Limited (IRI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Integrated Research Limited FY '22 Results Investor Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. John Ruthven, Chief Executive Officer. Please go ahead, sir.

Good morning, and welcome to the FY '22 Full Year Results Briefing for Integrated Research. My name is John Ruthven, and I'm the CEO of IR. With me today are Peter Adams, our outgoing CFO; and Matthew Walton, our Interim CFO. I will open the presentation and then hand it to Peter to take us through the detailed financial review. He will then hand back to me to talk through strategy and priorities. At the conclusion, we will open it up for questions, and both Peter and Matthew will be available to take questions at this time. This morning, we posted our results presentation to the ASX website, which we will be referring to during this call. You can also find a copy of it in the ASX announcement section on our website at ir.com. Moving to Slide 2. Integrated Research, or IR as we are better known, is a global software company, providing performance and experience management solution for critical business systems. We have 3 product lines: first is Collaborate for unified communications, and UCaaS, or unified communications as a service; second is Transact, which sits in the payment space; and thirdly, our infrastructure product, the Hewlett Packard Enterprise, or HPE NonStop environments. Common to the customer use cases that we support are complexity, mission criticality and scale. Going to the next slide. We have over 600 customers across our global enterprise customer base including more than 25% of the Fortune 500 companies, well-known global brands in key industries, technology, telecommunications, financial services, government, health care and higher education. We have strong growth in users on our SaaS platform for our cloud and hybrid solutions over the prior year. These customers rely on our solutions for performance and experience management of their core mission-critical systems. I'm on Slide 4, CEO Key Messages. It goes without saying that FY '22 was a challenging year. The macro environment contributed to sales cycle deferrals and pressure on our retention, particularly for Collaborate. Enterprise customers continue to assess their platform strategy for keeping their technology on-premises against the benefits of UCaaS solutions like Microsoft Teams. Whilst we saw over 450% growth in users on our SaaS platform, this growth has been slower than anticipated. Enterprise customers moving from Cisco and Avaya go through a rigorous evaluation process to select the UCaaS experience management solution vendor like IR. To date, this has not been a single sales motion and it's a process that takes time. At the same time, we recognize that we have had field execution issues, in part to address this, we have made leadership changes in both the Americas and Europe. We have realigned the business to drive both efficiency and execution. We remain confident that the market trends across both Collaborate and Transact product portfolios support our future growth ambitions. Our 3-phase growth strategy of innovate, execute and scale remains appropriate to the business. However, we have seen an extension in the execute phase as we look to gain traction with our new products with scaling the business to follow. Importantly, the balance sheet continues to support our self-funded innovation and growth agenda, and we are pleased to have reported a strong cash position with no debt. Company achieved annual profit after tax of $1.5 million, which is at the upper end of the guidance provided to the ASX in early July. Statutory revenue for the year was $62.9 million, down 20% over the prior year. The decline in performance was a consequence of external trading conditions, market disruption, delays in new product, traction and sales execution, Typically the fourth quarter of the financial year is the company's strongest period for sale. However, the deteriorating macroeconomic environment caused by geopolitical unrest and inflationary pressures resulted in customers delaying or canceling purchasing decisions. Sales execution risk was much higher in FY '22 due to the lower renewal volume compared to preceding years. Cash receipts from customers totaled $75.5 million, down 4% over the prior year. The company continues to benefit from term-based noncancelable license contracts with a high-quality customer base. This, together with other revenues, has yielded an improvement in net cash of $12.3 million, up from $5.5 million in the previous year. Now on Slide 6. As provided in previous investor updates, we continue to report revenue on a pro forma subscription basis, which we believe is more reflective of the underlying performance of the business. Subscription revenues for the year were $68.4 million, down 2% and represent 86% of total pro forma revenue, which also includes revenue from testing solutions and services. Our cash conversion rate for the year ended 30 June was 95% and shows the close alignment of this revenue series to cash receipts. Going to Slide 7. As previously shared, we've been working on an internal unit economics project to better inform management on the progress of the business as well as provide better insights for investors. The first phase of this was a key performance indicator table that was included in previous earnings presentations. Coming off a difficult year, it shows in the dashboard, pro forma revenue retention was ahead of plan, but by contrast, we fell short on customer retention and TCV from the new products to existing customers. The customer retention shortfall was more heavily weighted to Collaborate, with some customers transitioning off their on-premises platforms. In Q4, a number of new customer opportunities were deferred, and we came up short on our new customer wins target of 75 with 41 new wins. This has a knock-on effect of missing our TCV target for new customers. Despite the difficult trading result, we maintained our investment in innovation across our 2 primary product domain. New product traction is behind plan and changes to field leadership and the go-to-market strategies have been made to address this. Falling short on our TCV objective impacted our ability to grow the cloud deferred revenue backlog. We remain focused on ensuring that the company operating model is transitioning to support an annualized subscription business model. I will now hand over to Peter to provide a detailed overview of our FY '22 financial performance.

Thanks, John. We are on Slide 9. As communicated at last year's AGM and the half year results release, total contract value, or TCV, is a key measure of IR's performance. TCV represents the total value of a revenue-generating contract written in the year. It includes software license and related maintenance, cloud bookings, testing bookings and consulting services. TCV for FY '22 was $56.7 million, down 25% over the prior year for reasons that John highlighted earlier. You will see that we have reported annual recurring revenue for the first time. Annual recurring revenue as of 30 June '22 was $68.1 million, up 3% over the prior year, supported by long-dated noncancelable contracts. Net revenue retention was 94%, up 2 basis points. Transaction infrastructure revenue retention was close to 100%, while Collaborate revenue retention was 88%. The lower Collaborate retention rate is driven by customers delaying their renewals as they evaluate their future UC solution requirements as a consequence of the increase in work from home and other hybrid working environments. Turning to Slide 10. In FY '22, cloud and hybrid solutions represented 13% of TCV and almost doubling of the contribution from the prior year. As of 30 June '22, there were 470,000 users on the new platform in either a hybrid or cloud capacity, representing growth of 459% over the prior year. Contract life is relatively stable at 2.6 years. Looking at the TCV renewals and new charge, there was a far greater percentage of new and capacity sales relative to the prior year. Turning to Slide 11, TCV by product. Collaborate TCV for FY '22 was $27 million, down 27% over the prior year. The dissection of renewal and new business shows 2 diametric movements. Renewal business of $10.5 million was down 57%, in part due to there being fewer contracts up for renewal and in part due to some nonrenewals from the UC market disruption mentioned earlier. New and capacity sales of $16.5 million was up 31% over the prior year. The source of new business was broad, including sales across both on-premises and hybrid solutions. Both Transact and Infrastructure TCV results were down due to the timing of renewal contracts and new solutions taking longer to gain market traction. We are on Slide 12. Asia Pacific was the standout region for FY '22. APAC achieved TCV of $14 million, up 36% over the prior year, with growth experienced across all product lines. Notably, the achievement was across both renewal of existing business and growth in new business. By contrast, both the Americas and Europe experienced declines in TCV. The Americas turnaround plan has taken longer to execute. With Europe, whilst there was growth in the first half, performance fell in the second half. This is likely due to the consequence of regional insecurity, together with other negative business sentiment. We have taken action to improve performance across both regions, including change in regional leadership, which John will speak about later. Slide 13 presents pro forma subscription revenue for both geographic and product sets. For simplicity, we have combined transaction infrastructure in the geographic set, and Europe and APAC in the product set. These charts provide more insight than provided in previous presentations. To be clear, these charts are not to be confused with either the TCV charts on prior slides or the statutory revenue shown in the financial report. Pro forma revenue is a trailing measure of performance and the result of historic TCV achieved. The numbers represent recurring revenue based on amortized license fees, maintenance and SaaS revenue for the year. What do we glean from these charts? For each region, we can see the makeup of product and whether the product set is growing or declining. For instance, APAC has higher subscription revenue from Transact and Infrastructure compared to Collaborate. It is also showing growth across both product sets with Collaborate growing at a faster rate. If we take Transact from the bottom row, we see that it has an equal distribution between the Americas and Rest of World, with the Americas growing more strongly. Turning to Slide 14 titled Operating Leverage. We finished the financial year with 202 staff, compared to 240 staff at the start of the year. The decline in staff numbers reflects the realignment of the business to the changing market environment. Our innovation agenda remains unchanged as illustrated by the left-hand chart. The jump in R&D expenditure primarily reflects the amortization of the new cloud platform and release of new products to market. John will later provide further insight into the nature of the development spend and new solutions to market. Our sales and marketing spend pulled back during COVID with less travel and trade shows. This trend will slightly reverse as customer face-to-face meetings and marketing events return. FY '22 represents the first year where we have incentivized the sales team on TCV. This will continue into the FY '23 financial year. Cash flow from operations, such shown on Slide 15 were $16.9 million for the year, with a cash conversion rate of 95%. The company continues to benefit from noncancelable term-based license contracts. This cash generation continues to support ongoing development and fund future growth. The balance sheet shown on Slide 16 shows a significant improvement in net cash for reasons shown from the previous slide. The company is free of debt and has $12.3 million of cash. Trade receivables of $68.8 million is a strong source of future cash flow. I will now pass back to John for the rest of the presentation.

Thanks, Peter. I'm on Slide 18. IR target market is the 600 million unified communication users, whereas our true sweet spot is the nearly 180 million sophisticated conferencing users. Today, we have 5.8 million users or around 3% share. The addressable market is growing at over 7% CAGR. Driving the requirement for specialized tools to manage these complex environments is the proliferation of remote working and the user expectation that they should be able to do their work seamlessly. The CIO's challenge is balancing user experience and expectations with the increasing complexity of managing these environments and the proliferation of devices. We expect that there will be a long tail to on-premises based on the large enterprise market that we serve. This year is supported by our customer engagement and recent wins. Moving to Slide 19. The uptake of remote working was accelerated by the pandemic, and Gartner says, it's here to stay. At the same time, the conferencing and unified communications market is moving rapidly to the cloud, led by Microsoft Teams. The mix of cloud, on-premises and hybrid solutions increases complexity, and managing this complexity is core to IR's value proposition. We support existing on-premises solutions, as well as hybrid and cloud solutions, effectively supporting a customer's digital transformation journey. User experience is key, which comes with the expectation that their collaboration and UC environment just works. When they don't, support staff are under pressure to quickly identify and resolve the source of the issue. As I move to Slide 20, the opportunity for Transact is significant with IR currently monitoring approximately 600 million transactions a day and a global payment CAGR of 18.6% forecast in FY '23. This growth has been brought about by the rapid rate change in the payment sector over the last couple of years and the overwhelming shift to cashless payments. Now on Slide 21. We continue to see a massive shift in consumers and businesses moving to noncash payment methods. In support of this is the expansion of payment types and channels, increasing use of debit and credit cards, as well as real-time payments displacing legacy batch systems. With all of this comes the increasing complexity, additional systems, applications and the greater risk of issues and values. In response to this, we have launched new products and continue to enhance existing ones to upsell to existing customers and win new ones. User expectations continue to increase around the seamless experience. At the same time, payments providers are looking to monetize their data in order to acquire new customers, grow revenues and optimize costs. Moving to Slide 23, strategy. Our strategy remains focused on the 3 core product lines: Collaborate, Transact and Infrastructure. Consistent and core to these pillars, the strategy is to leverage the structural market changes of remote working and cashless payments, support our customers in their evolving journey as they transition from on-premises through hybrid and cloud, leverage our existing customer base and market position to move into adjacent and higher-value segments, continue to build long-term recurring revenues as we transition the business model away from upfront revenue recognition. And finally, organically drive this change through self-funding development of new SaaS products. Now on Slide 24. To deliver on this strategy, we're executing a multiphase transition, innovation, execution and scale. In the innovation phase, we brought to market our new SaaS platform as the foundation for a range of new products. This innovation is ongoing, and the launch of new and enhanced products will continue in order to meet current and emerging customer use cases. The execution phase is taking longer than we anticipated as we move to selling a much higher percentage of new business. We are confident that the go-to-market design is right and investments in our demand generation capability will pay off. We're also iterating our generation I new product with our customers and partners to better position and grow. As we transition to scale in the future, we will move from contracting upfront revenues to better quality SaaS subscription revenues with higher levels of annual recurring revenues. As Peter referenced earlier, Slide 25 highlights that our innovation agenda remains firm. Across the last 2 years, we have enhanced our cloud platform and brought new solutions to market for both Collaborate and Transact. We've continued our investment in our on-premises solutions and the combination of all these investments has facilitated the capability to serve on-premises, hybrid and pure cloud environment. This means we can flex with the market and support customers on their individual journeys. Moving to Slide 26. Core to our strategy and investment in innovation is supporting our customers on their journey, whether they require on-premises, cloud or hybrid solution. This is a balancing act between the 2 primary product portfolios of Collaborate and Transact. In the last year, we launched space managing for conferencing rooms and monitoring connections between session border controllers, or SBCs, and direct routing. What this essentially means is that we can monitor audio calls for organizations who connect external phone lines and use Microsoft Teams as an office phone system. The SBCs help us monitor these audio calls on carrier networks, such as Telstra, for example. On the Transact side, we are active in the market with SaaS-based payment analytics product, which enables payment providers and merchant acquirers provide their merchants with richer data and greater insights. Reporting our existing customer base, we continue to innovate our on-premises solutions. In Collaborate, this is very much about supporting their hybrid journey. For example, to have an existing Cisco customer, integrate the management of their Teams' environment into a single pane of glass rather than sifting through multiple dashboards and reports to make sense of the performance and user experience in their environment. In Transact, we delivered new products to market for high value and real-time payments. As we look into the future, for Collaborate, we'll add support for additional devices like headsets, as well as increase the richness of our analytics and insights. For Transact, we have completed feasibility on a private cloud deployment to address data governance concerns of some large payment providers. We've also expanded our service provider analytics capability. Foundational to this is the ongoing evolution and enhancement of our platform, both in SaaS and on-premises environment. These teams here are third-party integration, security and service provider support. Moving to Slide 27, lets actually take a look at the product. This is a Collaborate use case, which demonstrates how IT operation can drill down to root cause identification, moving away from a simple traffic-light table with a modern instrumented dashboard that provides a rich set of information for analysis and troubleshooting for informed resolution. For those interested in seeing a visual demonstration, I would like to direct you to our website, which provides numerous videos of our team members demonstrating the dashboards. On Slide 28, we've summarized a customer case study with GlaxoSmithKline, or GSK. Their challenge was the complexity brought about by numerous systems, platforms and geographies and be able to troubleshoot and resolve issues in a timely manner. Critical to IR's solutions is our real-time capability that resulted in GSK reducing resolution times from an average 16 hours to under 5 minutes. Now on Slide 29. Similar to the previous Collaborate slide, the Transact user journey is one of making the complex simple. We bring out the hidden meanings of your processing data in a single view. Moving to Slide 30. This scenario at Rabobank highlights a typical use case for many IR Transact customers by continually upgrading their systems to support new payment types. However, when doing this, they need to maintain a common set of monitoring and analytic tools to support their changing environment and regulatory obligations. This is why we have introduced support for new payment types, such as real-time payments, while still supporting a consistent look and feel as for existing card payments. Moving to the final slide, Slide 32. We're in the execution phase of our strategy. We have a firm foundation from which to grow and have clear priorities for the year ahead. Critical to our return to growth is the Americas and Europe. We've made leadership changes, enhanced our go-to-market model to balance the requirements of retention, upsell and winning new business. Getting the new products we have launched into the hands of our customers and prospects is a critical focus. We've invested in our sales engineering function to improve our demonstration capability, as well as opportunity qualification and getting the technical win. We have clear line of sight to our customer renewals where they may be at risk as well as our customer plans for their unified communications and payment platforms. Whilst we can't influence their migration decisions, we've optimized their go-to-market to maximize our retention opportunity. Our phased strategy kicked off with bringing a SaaS platform and product to market. In modern software development, this implies moving quickly to get generation I product in market. Focused work is ongoing with customers to bring generation II products through enhanced performance, add new capabilities and reduce the cost of running the platform. We've realigned the company to be more efficient and retain a strong balance sheet to support our self-funding model of innovation and growth. Whilst we're not providing specific guidance, IR is well positioned for self-funded innovation and long-term growth. Operator, that concludes the presentation. We can now open it up for questions.

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

John, forgive me, I joined the call a bit late. So you've touched on the questions, I'm going to ask to please forgive me. FY '22, you'd always flagged that it wasn't a big year for renewals, and hence, the focus more on adding new logos. Is FY '23 a big or bigger year for renewal?

We have a stronger renewal portfolio or inventory in FY '23 than we did in FY '22. So I think that gives us a better foundation.

And are you able to point me to the area like between Collaborate, Infrastructure and Transact, or is it just across all 3?

Yes, it's pretty much across all 3. And from a weighting perspective, it's probably weighted a little bit to the second half.

Okay. And were there any renewals that got deferred in FY '22, and in particular, the second half that now might fall in FY '23?

We run a reasonably tight cadence on taking renewals in the period that they are due. At times, you do have renewals that will move into an earlier period driven by a customer requirement or event. For example, we've got one in play this year where a large financial institution is divesting a unit. So they're coming back to the table for a new agreement. In terms of renewals, though, we didn't see deferrals of those. What you may see in the graphs where it shows the renewal value, and on a year-over-year basis, a reduction that could be affected by principally 3 things, which is that customer renews for a shorter term. As we all know, our revenue upfront model means that a shorter term drives less TCV in revenue. Secondly, that they may have reduced their usage, and in some cases, losses. From a loss perspective, we haven't seen any significant competitive losses. Losses would be more attuned in Collaborate, for example, where the customer moves off their on-premises platform, or in Infrastructure, they might cease using the NonStop platform.

And just on that point, I know it's been a trend for a few years now, but are you seeing customers renew on shorter term?

Largely. I mean, you'll see the average weighted life of contract is 2.6 years, which I think is actually up slightly from the first half, but it's back from a couple of years ago where it was slightly north of 4 years. We've certainly seen a greater impact in contract length with Collaborate, whereas with Transact and Infrastructure, customer confidence is still pretty high on their forward capacity plan.

So given it's up slightly to that 2.6%, do you think now it stabilized across the 3, and particularly in Collaborate?

We certainly hope so. I mean there are instances where customers simply want to renew for 1 year. And I guess, the truth is that as more of our business moves to subscription and ARR customers may want to simply let the contracts roll over. However, our objective remains to have long-term noncancelable contracts is a strong foundation for the business.

Our next question comes from the line of [ Ray Tollefsen ] from Teaminvest and a shareholder.

A couple of questions from me. Other than the generic reasons you gave for delays in that, in particular -- I'm interested more in the cancellations. Did you get any feedback as to why clients were canceling the contracts?

Ray, I'll take that in the first instance. Peter, feel free to chime in. So the primary reason for cancellations is that the customer is moving off the platform. So what we are seeing with the Collaborate portfolio is that customers are moving from Cisco or Avaya to Teams. So they either may reduce their on-premises usage, or in some cases, migrate away from it. And the same is true in the Infrastructure domain, where our solution sits on top of the HPE NonStop. And if the customer ceases using that platform, then they wouldn't renew our contract.

So do they go to some other monitoring type of service or they just don't need it?

If they've migrated away from the platform, then they are essentially running those workloads on an alternate platform base. So one that we don't monitor.

Okay. And second question, and given the new product uptake has been slower than you expected, how is the actual need for new products determined? In other words, is it client feedback? Or are you sort of trying to them into what you think they should be doing?

It's a good question, Ray. It's truthfully, it's a little bit of both. Our product management team, we've made some changes in the last 12 to 18 months to align them much more closely to the field, but they would take inputs both in the near term, if you will, from specific customer requirements. But we also expect that they are well versed in the industry so that they are ahead of customer requirements and potentially solving problems for customers that they don't even know they have yet. So there's a little bit of a science to how you do that. And then, of course, our field organization would be providing very specific input in specific sales opportunities where we'll come up against specific use cases, and a customer will say, that's great. You do these things for me, but I have a specific use case, and then we will either meet that by a product response. So in some cases, we can use our professional services organization to provide a customization or configuration for them.

Okay. And just before I close, thanks very much, Peter. I've met you a couple of times at AGMs, and you've always been very easy to talk to and open in that. So bit of a shame to see you moving on. But anyway, thanks very much for your services today and all the best for the future.

Yes, thanks very much. Really appreciate that feedback. Thank you.

Our next question comes from the line of [ Nicolas Debenham ], an investor.