Integrated Research Limited (IRI) Earnings Call Transcript & Summary

Welcome to the Integrated Research FY '26 Full Year Results Briefing. My name is George Kopsiaftis, and I'll be your moderator for today. With us today, we have Chief Executive Officer, Ian Lowe; and Chief Financial Officer, Christian Shaw. Good morning to you both. The format for today is for Ian and Christian is to spend about 30 minutes discussing the results that were lodged this morning on the ASX platform. This will be followed by a question-and-answer session. [Operator Instructions] And with no further ado, I'd like to hand it over to Ian and Christian to get us started.

Thank you, George, and good morning to everybody. My name is Ian Lowe. I'm the CEO of Integrated Research. The presentation that was lodged with ASX this morning will include a brief high-level business update from myself, following which, Christian Shaw will take us through the financial results, and I'll provide further information and update in relation to the company's strategy. So if we move to Slide 4 of the presentation. I think it's well known to many that Integrated Research has, for many years, provided real-time monitoring and observability of critical technology and infrastructure to some of the world's largest organizations and enterprises with particular strength in the verticals that are highlighted being technology, financial services, government, health and also in retail. Moving on to the next slide. Some of the key themes that we're going to expand on in the course of the presentation. The first is continued product-led growth execution. So we've made some encouraging progress against our new product agenda with some new AI products launched in FY '26. Our product investment is ongoing, with new product releases to continue, and I'll expand on this shortly. Our FY '26 financial performance, we saw strong cash generation and a strong closing cash balance. Christian will expand on this shortly. And today, we're announcing an increased ordinary dividend and also a special dividend. Our FY '26 revenue was down on the prior year. This is really driven by a softer renewals book and in the second half, a softer new business contribution. And this reflects a cautious market and protracted procurement cycles. And again, I'm going to expand on this through the presentation. Moving on to Slide 6. The highlights relating to our product-led growth strategy. So new products were delivered. And importantly, first clients were activated. This included Iris, which is our AI platform, and it's fully integrated into the Prognosis product experience. And this is really powering deeper discovery for clients, leveraging the data that is harvested and captured within Prognosis. We also completed the beta launch of our first product from IR Labs. This is an AI platform that automates software quality assurance and again, we've activated first clients. In FY '26, we also made available our Prognosis Elevate, which is really the same Prognosis product, but hosted by IR on behalf of the client. So essentially, Prognosis becomes available as a service. And we also completed a full implementation of our high-value payments product with a top 10 U.S. bank and we're progressing engagement with other major global banks. Our new AI products also introduced a usage or utilization-based revenue model. And so I will expand on this through the presentation. A usage-based revenue model supports our product-led growth strategy, which is sustainable revenue growth over the medium to long term. And just to be clear about that medium to long term really is a horizon of 3 to 5 years. Our product-led growth execution, we saw product and technology investment to deliver new products increased by 29% and with cost management discipline, we're able to offset that with other cost savings. FY '26 really established this new products engine within the business around client engagement, innovation, engineering and those cadences we're really looking to improve through FY '27. So with that, I'll pass over to Christian to take us through the financial update.

Thanks, Ian, and good morning, shareholders. It's again my privilege to present the financial results for the year ended 30 June 2026. In conjunction with this presentation, shareholders are encouraged to read the appendix 4E in FY '26 financial report, FY '26 full year results, the dividend distribution and the appendix 4G corporate governance statement announced with the ASX this morning. Let's begin with the key financial metrics for FY '26. In summary, the year was challenging. As was apparent from the July trading update, second half trading was broadly flat to the first half, resulting in core operating performance below FY '25. Added headwinds included first half expected credit loss or bad debt expense together with second half foreign exchange losses. These factors ultimately resulted in an EBITDA loss and a modest net profit after tax. Statutory revenue for FY '26 was $57.6 million, down 16% on FY '25. Renewals performance and revenue contribution were lower than FY '25, reflecting a softer renewals book as was largely anticipated. Expansion and new client revenue declined to PCP, and this will be covered off later in the presentation. FY '26 operating expenses exceeded FY '25 and included a relatively large expected credit loss provision expense. Excluding those losses, operating expenses were modestly below the prior year. Product and technology expenses increased materially while other expense categories reduced in line with strategy. The EBITDA loss of $2.1 million and net profit after tax of $1.2 million, while improved in the second half were well below FY '25 results of $15.9 million and $13.4 million, respectively. Cash increased to $51.7 million. Net assets remained strong at $98 million, and the company remains debt free. Lastly, the company declared an increased ordinary fully franked dividend of $0.03 per share, up from $0.02 in FY '25, and in addition, a special fully franked dividend of $0.03 per share. The special dividend represents a return of capital while maintaining balance sheet strength and funding capacity for future growth initiatives. We now turn to pro forma revenue, an underlying measure that adjusts statutory revenue by recognizing license fee revenue from term-based contracts evenly over the life of each contract. As license fees represent the largest component of revenue, this provides an informative view of underlying business performance. This measure smooth cyclical movements in the renewals book and allows for easier comparison across reporting periods. It's particularly relevant given the significant majority of the company's revenue is generated from contracted term base arrangements. For FY '26, pro forma revenue was $65.8 million, down 12%. On FY '25 with term-based revenue down 11% and services revenue down 20%. The company's product-led growth strategy is focused on delivering sustainable growth in pro forma revenue. This will occur when growth from new clients and expansion within existing clients exceeds churn and downsell activity. The product-led growth strategy remains central to achieving that objective. This slide shows pro forma revenue by territory and product. And in FY '26, the company experienced declines across all territories and product categories. The Americas, our largest market, representing approximately 68% of pro forma revenue was down 13% on FY '25. Performance in the region was impacted by declines across all products, with collaborate broadly consistent with overall business trends, while declines in transact and infrastructure primarily reflected downsell activity within the client base and a shift from upsell driven growth in prior years. APAC was down 7% on FY '25, while Europe, our smallest market, was down 11%. Both regions experienced smaller reductions across all products with ongoing customer churn and contraction being partly offset by new business activity. Turning to products. Collaborate, which represents near on half of our pro forma revenue declined 11% for the year, which was similar to the trend in the prior year. Churn and downsell activity, while stable, continued to outweigh contributions from new business wins and client expansion. Transact representing 23% of pro forma revenue declined 14%, primarily due to downsell activity and the effect of an end-of-life product. A smaller impact was felt from lower services revenue. Infrastructure, representing 28% of pro forma revenue declined 11%, a small increase to the first half, while downsell activity accounting for the majority of the decline and reflecting the annualized effect from late FY '25 of 2 large contract renewal outcomes that were down sold, the largest of which was JPMC as advised to the market in March 2025. Despite some early progress in product-led growth initiatives, churn and customer contraction continue to be the primary factors constraining a return to pro forma revenue growth. This slide shows FY '26 statutory revenue of $57.6 million, down 16% on FY '25. The reduction reflected lower revenue recognized both at a point in time, which decreased to $38.8 million from $44.6 million and over time, which reduced from $18.8 million from $23.7 million. The primary driver was lower license fee revenue, which declined 13% versus FY '25. License fees remain the largest component of statutory revenue and the result reflected a combination of a softer renewals book and the timing of contract closures across new business activity. Maintenance revenue declined 12%, while the smallest component subscription revenue decreased 54% after a nonscalable solution was discontinued in the prior period. Services revenue declined 17% following the sale of the testing business during the prior year. As a reminder, statutory revenue is largely comprised of license fees recognized upfront rather than over the life of the contract. Accordingly, statutory revenue can be inherently lumpy and tends to track closely with total contract value or TCV, which remains our primary sales metric and that's included in the appendix to today's presentation. A key objective of the product-led growth strategy is to increase recurring and consumption-based revenue streams over time. As that mix evolves, revenue should become less dependent on individual contract timing and demonstrate greater predictability. The timing and magnitude of the contribution from these initiatives remains uncertain. The next slide highlights FY '26 EBITDA, a commonly used non-IFRS profit measure. For FY '26, EBITDA was a loss of $2.1 million compared with a profit of $15.9 million in FY '25. The result primarily reflected lower revenue, together with a sizable increase in expected credit loss provision expense and foreign exchange losses. The key drivers follow. Firstly, statutory revenue declined 16% to 57.6%, reflecting lower license fee, maintenance, subscription and services revenue. Revenue continued to move broadly in line with total contract value and the timing of contract activity. Second, expected credit loss expense for the year has provided for almost entirely in the first half of $5 million compared to $100,000 in FY '25, approximately $3.8 million of which related to a single client. And consistent with previous commentary, this reflected changes in the client's credit profile and was unrelated to software performance. Thirdly, operating expenses. Excluding expected credit losses and depreciation and amortization were $53.1 million, down 2% on FY '25. This reflects continued cost discipline while maintaining investment in strategic growth initiatives. New product expenditure continued in accordance with the company's growth strategy and no R&D expenditure was capitalized during the period. Finally, other losses of $1.6 million compared with a gain of $2.1 million in FY '25. FY '26 included $2.7 million of foreign exchange losses whereas FY '25 benefited from gains associated with the sale of the testing business and favorable currency movements. Importantly, excluding credit losses, the company continued to demonstrate cost discipline while investing in product innovation and growth initiatives. While revenue performance remained below the prior year, management continues to invest in products and capabilities designed to support future growth and strengthen the long-term earnings profile of the business. Turning now to balance sheet and cash generation. We finished FY '26 with a strong balance sheet and cash of $51.7 million, up 27% from the prior year, while remaining debt free. Cash increased by $11.1 million during the year, demonstrating the resilience of the business and our continued focus on cash generation. Operating cash flow was particularly strong, with net cash generated from operating activities of $12.6 million compared with $8.7 million in FY '25. While customer receipts were modestly lower year-on-year, this was more than offset by disciplined cost management and lower income tax payments. Importantly, we continue to invest for growth increasing product and technology expenses by 29% while offsetting that increase through savings across sales and marketing and general and administration expenses. As a result, we strengthened operating cash flow without compromising investment in our product-led growth strategy. Turning to the balance sheet. Net assets closed at $98 million with total assets of $119.4 million and liabilities of $21.4 million. Cash and receivables together represent almost $110 million of total assets highlighting the quality of the balance sheet. Overall, we remain very well capitalized. The combination of a debt-free balance sheet, $51.7 million of cash and being cash flow generative provides the flexibility to continue investing in our growth initiatives while supporting the Board's decision to declare a final fully franked dividend of $0.05 per share, including the $0.02 special dividend. My final slide today, capital allocation framework. Our capital allocation framework remains centered on investing for product lead growth while balancing shareholder returns, strategic flexibility and appropriate capital reserves. As we move into FY '27, the framework provides a clear allocation of capital to support growth ambitions and long-term value creation. Management remains focused on disciplined ROI-driven and milestone-based capital deployment. The first priority is innovation investment including continued development of the Prognosis platform and IR Labs, the company's first AI innovation initiative. Over the medium term, we expect 30% to 35% of available capital to be allocated to product innovation. The second component is flexibility reserves with between 20% and 35% of available capital maintained to support opportunistic growth initiatives, including strategically aligned acquisitions that complement our product road map and growth objectives. The framework also maintains a strong focus on contingency reserves with 30% to 35% of capital allocated to supporting working capital and future liquidity requirements. Finally, the framework continues to support shareholder returns. The dividend policy targets a minimum distribution of 25% of free cash flow and is subject to Board discretion as demonstrated this year with the dividend increase and the addition of a special dividend. Importantly, while the company remains committed to delivering shareholder returns, the immediate priority continues to be investment in product-led growth opportunities that enhance organic growth, strengthen competitive differentiation and create sustainable long-term shareholder value. Management will continue balancing these objectives while maintaining financial flexibility and a prudent capital position. Thank you, Ian.

Thanks, Christian. I'm going to move into the next section of the presentation, product-led growth update. So if we look at Slide 16, this really talks about the product-led growth strategy and introduces some of the observations that we're seeing in the business today. So investment in new products is absolutely essential to establishing sustainable growth over the medium to long term, which is the horizon that we've communicated. Today, IR has a mature product set, and we operate in a really competitive global market. And so what this speaks to is the strength of the product market fit. And we recognize that this needs to be improved, and investing to build new products is how we do that. The investment increase of 29% that we've alluded to in product and technology in FY '26, did see us deliver new products. And as mentioned previously, we're able to activate first clients. We're now capturing feedback from those clients and in the process, we've established usage-based revenue models. The introduction or emergence of AI has inevitably led to some market disruption. Now for IR, this emergence of AI really presents both risks and opportunities. The risk that we've seen has manifested in protracted procurement cycles. Clients are taking longer to make decisions, and in tandem with this, they're committing to contract terms that, on average, are shorter. And so really, what these dynamics translate to is a more cautious enterprise mindset. On the opportunity side, AI presents significant benefits to IR. It allows us to expand and accelerate our program of product innovation. It allows us to deliver greater value within the products that we already have by introducing AI and enhancing features at an operational level that allows us to target productivity benefits. So the product and technology investment program continues. Our investment in product and technology continues. Our program to deliver new products in return or as a result of that investment also continues. And all of this aligns to the sustainable revenue growth objective over the medium to long term. If we go to the next slide on the growth metrics. This is really reflecting the themes that we've already established around longer decision making cycles coming out of large clients and shorter contract terms. So the new client revenue and the expansion revenue, these metrics are the license fee components that we extract out of new clients and expansion revenue from existing clients. And so again, we saw slower decision-making coming out of clients that impacted these metrics year-on-year. And we also saw shorter contract terms being committed to. Now despite all of that, we did have some significant new client wins, particularly in verticals, including government in the U.S., health and finance across multiple geographies. And on expansion revenue, our wins were strongest in the finance vertical, and this is aligned to our Transact product. So moving to Slide 18. This is really just a visual representation of some of the themes that we've already shared. So FY '26, we delivered some foundational new products. We created this engine, we're working closely with clients building innovative new products and then releasing those products to drive first activation and building the sales pipeline off the back of those product releases. FY '27, our attention turns to continuing with that effort, so continuing to build new product enhancements, we will release new products in FY '27. And we're going to expand and deepen our client engagement. We think that, that's particularly important as it validates the new product projects and helps us with the business cases that justify the investment in those new products. In parallel with that, having launched some usage-based products, we're really focused on driving the adoption and the utilization of those products. And as we increase that adoption and utilization, that will contribute revenue growth. So observations, moving to the next slide. I've talked about AI being both a disruptor and an enabler and our response is to incorporate AI and embed it into our product offering. Iris is an example of how we've done that in FY '26. Building new stand-alone products that are born AI-enabled. We've talked about the IR Labs beta release and integrating AI tooling into the operations of the business for productivity and cost efficiency. I think it's important to recognize that while AI does present disruption and disruption generally, IR does have some leverage. The observability solutions that we provide today remain critical to large organizations around the world. So the need for that observability remains. Secondly, the data that we harvest often lies deep within the client's technology stack and it's difficult to access. IR has been an incumbent with a number of our clients for 10 or 20 years, and we're deeply trusted deep within that tech stack and trusted with that data. On the flip side of that trust equation, AI really is an open consideration for most of our clients, particularly those that operate in highly regulated verticals such as finance, government and health, verticals in which we have a strong representation. And the final point I'd make is that the data that we harvest is inherently complex. And over many years, we have built highly specialized capabilities, understanding and interpreting that data. From a product strategy perspective, in recognition that clients are making decisions more cautiously, we also are responding by building products that minimize the deployment friction. So products that are easier and faster to both deploy and adopt. Our usage-based revenue models also minimize price friction. Clients don't need to commit to upfront contract terms and upfront fixed costs. The cost of the client is purely based on their usage, and this links to our focus on driving that adoption and driving that utilization. And then thirdly, minimizing contract friction. The contracting process with large enterprise, particularly in these regulated verticals is significant. But by incorporating new products into client contracts where they're usage-based, it avoids additional contract cycles, which responds specifically to the protracted decision-making that we're observing. So if we just move to the next slide, just to summarize some of the points that we've touched on today. FY '26 fully franked dividend of $0.05 per share, which Christian has spoken to comprising of an ordinary dividend of $0.03 per share. This is an increase of the FY '25 ordinary dividend of $0.02 per share and a special dividend of $0.02 per share on top of that. Our lower FY '26 revenue performance reflects both the softer renewals book and a softer new business contribution, and we've talked about that being a reflection of a more cautious market, protracted decision-making and reduced average contract term. Continued cost management discipline in FY '26, which saw us with a strong cash generation result, a strong closing cash position. And in FY '26, we released our first new AI-powered products. Looking forward, it's really about continued product-led growth execution. We're going to continue to invest to build new products. That investment will impact our profit performance over the short to medium term. We're going to get closer to clients and engage more deeply with clients to inform our innovation agenda and in support of our new product development. A continued focus on our sales and our new product commercialization is really about minimizing churn and securing a growing contribution from new client expansion and SaaS revenues. And these are the 3 growth metrics that I highlighted earlier. And we also note that the FY '27 renewals book is weighted to the second half. So that concludes the presentation in terms of the slides that were published earlier today. I'll just hand over to George. I think we have a few minutes available to answer any questions.

[Operator Instructions] The first question here says, the IR product-led growth plan has been in the works for a few years now. How has the go-to-market structure changed during that time? And what IR products can be brought through this type of motion currently?

Yes. Thanks, George. So quite rightly, product-led growth is really about saying, we want our products and the enriched features within those products to be accessible and usable by clients without requiring necessarily stand-alone direct sales effort. So really, what we're executing to at the moment is with the existing product set, the direct sales go-to-market continues. And that's targeting both upsell to existing clients and also new clients. In parallel with that, we're activating a go-to-market that incorporates digital sales channels and digital communication to existing clients and prospects, where these products can be adopted more seamlessly and may not require direct sales activity. So it's a hybrid of the 2. And as we're able to increase the contribution coming out of new products, our expectation is that we will focus more on the digital channels where the go-to-market model doesn't require the same level of direct sales activity.

All right. Great. Next question. How quickly can the new AI products generate meaningful revenue?

Yes. Thank you, George. I'm happy to take this question. So I think the first thing is we're taking a portfolio approach to building new products, particularly AI-enabled products. So this is balancing enhancements to our existing products with investment in new products through our innovation, team IR Labs. Now some of those new products are very closely aligned to the core business. And some of those will explore entirely new markets and new use cases. And we look at the commercialization of these investments very much over the medium to long term, which I think, as I mentioned, is really a 3- to 5-year horizon. Now the timing and the scale of the revenue contribution from those new products will really depend on the profile of the customer adoption. And that's what we are focused on moving forward as a critical component of the product-led growth strategy.

Great. Next question. How differentiated are Iris and agentic -- I think this is SQA, versus generic AI tools?

That's another very good question. So I'm happy to take that one. So perhaps we start with the IR Labs beta release of a product called Agentic SQA. So a lot of the AI tooling that developers use today are about writing code faster. The IR Lab product really does the opposite. So it's checking whether the code is actually correct. It raises issues that may be associated with the code before it's deployed, and it verifies the code with evidence before an engineer actually ever sees the code. So think of this as the difference between an assistant who drafts a piece of work and an independent auditor who proves that, that work is valid. And building that proof layer is technically challenging, and that's what this product achieves. And that's something that more generic tools are not able to achieve. In relation to -- I think the question also asked about Iris. So in relation to Iris, first of all, this is an AI capability that's embedded into the Prognosis platform. So every client that uses Prognosis on version 13.2 or 13.3 has access to Iris. And it allows them to ask specific questions and extract very specific insights from the data that is captured within Prognosis. So I'd make the point that the data that is captured within Prognosis is not available, and it's not -- we haven't integrated AI or should I say that Iris is the only AI capability that is integrated into that Prognosis data. We also have the benefit of many years of experience harvesting and working with these complex data sets. So Iris applies contextual interpretation, which reflects those many years of our experience. So what that means is that AI Iris and the AI that powers Iris is tuned to derive insights that generic models are not tuned to achieve.

Great. A question for Christian. Why did the Board decide to increase the dividend?