Iress Limited (IRE) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Iress Limited 2026 Half Year Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Andrew Russell, Iress CEO and Managing Director. Please go ahead.

Good morning, and thank you for joining us. I'm Andrew Russell, Group CEO and Managing Director, and I'm joined by Cameron Williamson, our Chief Financial Officer. Today, we'll take you through our first half performance, updated FY '26 guidance and the progress we're making against the strategic priorities we outlined at our AGM. Most importantly, we'll show how disciplined execution is building a stronger, higher-quality software business and positioning Iress for sustainable long-term value creation. There are 5 key messages for our shareholders today. First, we have delivered a solid first half result with materially improved earnings quality, driven by disciplined execution, a simpler operating model and continued margin expansion. Second, we have continued to simplify the business, progressed our business efficiency program ahead of plan and strengthened the balance sheet. This provides greater financial flexibility to self-fund disciplined investment in product evolution. Third, our focus has now shifted to evolving our products. Having mobilized our partnership with Thoughtworks in April, we are now embedding AI into our product and engineering strategy and improving our delivery velocity. Fourth, our focus is on building a higher-quality software business with better products, stronger customer relationships and more consistent commercial execution. We believe that is the right foundation for sustainable growth and driving long-term shareholder value. And finally, we have updated our FY '26 guidance, reflecting softer revenue growth of 1% to 2%, driven by lower nonrecurring revenue and a higher cash EBITDA growth of 21% to 26% due to stronger underlying profitability. We remain confident in delivering our FY '26 cash EBITDA margin exit run rate target of 25%. Our first half financial performance demonstrates that disciplined execution is translating into stronger financial results. Revenue has remained resilient, up 2.5% on a constant currency basis, driven by higher quality recurring revenue that increased 3.4% and now represents 95% of revenue. Cash EBITDA increased materially, up 47.1% and margins expanded more than 740 basis points, reflecting both disciplined cost management and improved operational execution. Importantly, these results are not simply the outcome of cost reduction. They demonstrate the benefits of simplification, disciplined execution and a sharper operating focus. We now have greater financial flexibility to invest selectively in product evolution while maintaining a strong balance sheet. The Board has declared a $0.14 per share dividend, which is up 27% on the corresponding period, reflecting our stronger earnings and financial position. At our AGM, I outlined 4 FY '26 strategic priorities. These were operational excellence, product evolution, AI-enabled productivity and customer-led execution. I'm pleased with the measurable progress we've made against each of these priorities. Product evolution has now moved from planning to execution. We are targeting investment in our core platforms, improving product quality and accelerating delivery through our partnership with Thoughtworks. Initial Xplan enhancements are being delivered to our customers, while the rollout of the new EMS in our trading business is also underway. AI is embedded within this work, not treated as a separate initiative. We are using AI-enabled development tools to improve engineering productivity and delivery velocity while building AI capabilities into our product road maps, including Xplan. Our approach remains disciplined with appropriate governance and a clear focus on measurable customer value. Customer engagement is gaining momentum, supported by clearer road maps, improved transparency and a commitment to deeper enterprise partnerships. While there is significant work ahead, strengthening customer advocacy is central to our long-term growth strategy. These efforts define our next phase, moving from simplifying and strengthening to product evolution, deepening client relationships and driving sustainable value through focused execution and investment. I will now pass over to Cameron to speak in more detail about the first half financial results and our updated FY '26 guidance.

Thanks, Andrew, and good morning, everybody. I'll take you through the financial performance in more detail as well as our updated 2026 guidance. But the key message -- financial message today is that there is a material improvement in the quality of our earnings as referenced by recurring revenue growth, structural improvements in our cost base, margin expansion and disciplined execution. In terms of the overview, I will focus on the continuing business and there are 4 points that I would highlight. Firstly, recurring revenue remains resilient and grew at 3.4% on a constant currency basis. Secondly, the business efficiency program, which we announced in the second half of 2025 is delivering ahead of plan in both its quantum and pace of delivery. We've now delivered $31.5 million of annualized efficiencies through this period, which is materially resetting the group's structural cost base. Third, this is translating into a significantly stronger and cleaner set of earnings. Cash EBITDA increased 47.1% on a constant currency basis, with the cash EBITDA margin increasing more than 740 basis points to 24.5%. These represent material improvements over the last 12 months. Additionally, there's a 45% reduction in below-the-line items and these are trending lower and you'll see that in the second half of this year. And finally, the balance sheet remains strong with leverage of 0.5x as at 30 June. This provides financial flexibility to continue disciplined investment in product evolution while retaining capital management optionality going forward. Together, these outcomes demonstrate a structurally stronger and improving financial position for Iress entering the second half of 2026. Turning to revenue. Continuing business revenue increased 2.5% on a constant currency basis. And as I've already highlighted, recurring revenue grew at 3.4% versus the same period last year. Recurring revenue is 95% of our continuing business revenue, reinforcing the resilience of the underlying revenue base as can be seen in the step changes half-on-half in the graph. For the first half of 2026, the APAC Wealth business delivered notable growth in its recurring revenue, while the trading and market data business also continued to grow. Nonrecurring revenue was lower, particularly in the U.K. and this reflected the completion of large client projects and a lengthening sales cycle. This distinction is important. While total revenue growth remains measured, the recurring component of our revenue continues to grow and remains our focus as we improve customer retention, product value and commercial execution. The business efficiency program continues to deliver ahead of expectations. We have delivered $31.5 million of annualized efficiencies to date across organizational structure, technology and software, property and other OpEx items. But these are not simply short-term reductions in discretionary expenditure. The program is resetting the structural cost base of Iress and embedding greater operating discipline across the business. We expect to deliver a further $6 million to $9 million in annualized efficiencies during the second half with the full benefit of this flowing into 2027. This gives us confidence in the sustainability of the margin improvement while continuing to invest selectively in our strategic priorities. Turning to Slide 10. You can see the impact of that discipline in the earnings bridge. Revenue growth contributed positively, but the more significant improvement has come from the reset of our operating cost base, particularly across staff and non-wage OpEx. This resulted in cash EBITDA of $62.5 million on a constant currency basis, up 47.1% on the prior period. A stronger A dollar detracted $1.4 million in delivering a headline cash EBITDA of $61.1 million. CapEx was also materially lower in the first half, reflecting the completion of significant prior year investment and the timing of our current product evolution program. Importantly, we see a step-up in investment in the second half as product evolution moves further into execution. Even with that increase, we currently expect full year CapEx to be approximately 20% to 25% lower than the prior year. So while lower CapEx benefited first half cash EBITDA, the improvement in profitability also reflects the structural reduction in our operating cost base. Turning to the balance sheet. Our stronger operating performance is also translating into a stronger financial position. Leverage has reduced to 0.5x over the last 12 months, providing significant balance sheet flexibility. Our capital allocation priorities remain disciplined. We will continue to invest in the evolution of our core products where we see clear customer and financial returns while maintaining balance sheet strength and capital management optionality. Reflecting the strength of the financial position and confidence in the outlook, the Board has declared a fully franked interim dividend of $0.14 per share, an increase of 27% on the prior corresponding period. This represents the third consecutive growth in the dividend since it was reactivated for the final 2024 dividend. We believe this strikes the appropriate balance between investment in the business, shareholder returns while maintaining financial flexibility going forward. And finally, turning to guidance. We've updated our FY '26 outlook to reflect 3 key factors: firstly, lower nonrecurring revenue; secondly, stronger underlying profitability; and thirdly, a higher Australian dollar versus relevant currencies. We're highlighting things firstly on a constant currency basis for ease of prior year and guidance comparability. As highlighted at the AGM in April, we guided FY '26 revenue growth to be at the lower end of the 3% to 5% range, which we preannounced at the beginning of the year. We now expect FY '26 revenue of $509 million to $515 million, representing growth of 1% to 2%. This reduction primarily reflects approximately $7 million to $8 million of lower nonrecurring revenue compared with our previous expectations. At the same time, our structural improvement in our cost base means we have increased our cash EBITDA outlook to $121 million to $126 million, representing growth of 21% to 26%. UPAT is expected to be $84 million to $88 million. We also expect a step-up in product investment and R&D CapEx during the second half as the product evolution program accelerates into execution, alongside a further $6 million to $9 million of annualized business efficiencies. Importantly, we remain on track to deliver our FY '26 cash EBITDA margin exit run rate target of 25. The stronger Australian dollar during the first half of '26 also impacts our reported results with the A dollar appreciating 6% to 8% against the British pound and Canadian dollar year-to-date. This results in full year headline expectations of $499 million to $505 million of revenue, $119 million to $124 million of cash EBITDA and $82 million to $86 million of UPAT. So while the revenue outlook is lower, the underlying earnings outlook has strengthened and our 25% exit margin commitment remains on track. And with that, I'll hand it back to Andrew to continue the presentation.

Thank you, Cam. I'd like to step back and explain how we are continuing to think about the evolution of Iress as we execute at pace. When we entered '26, our priority was to build the foundations for sustainable long-term value creation. We see the Iress evolution journey in 4 stages. The first stage was to simplify the business. That included simplifying our portfolio through the divestment of noncore assets, returning focus to our core businesses of wealth and trading and strengthening our balance sheet. That work is now complete. The second stage has been to strengthen the business. We will now focus on simplifying the continuing business as well as materially improve profitability and cash generation through the execution of the business efficiency program, creating greater financial flexibility. We are now in the third stage, evolving our products and platforms to create higher quality revenue. Through our strategic partnership with Thoughtworks, we're accelerating the delivery of product road maps, embedding AI into our product and engineering strategy, improving productivity and delivering greater value to our customers. Together, these foundations position Iress for the next phase, which is growth, sustainable revenue growth driven by better products, increased platform adoption, stronger customer retention and disciplined commercial execution while maintaining attractive software margins. Each stage builds on the one before it. Sustainable growth is earned through disciplined execution. So turning to our second half strategic priorities. This pathway, which we've outlined, brings us back to our strategic priorities for FY '26. These haven't changed. In the second half, our focus is on executing against the commitments we have already made and translating investment into measurable outcomes. So turning to the first priority, operational excellence. The efficiency program will remain ongoing as the business evolves in the new AI landscape. We will embed the structural improvements already made and deliver a further $6 million to $9 million of annualized efficiencies in the second half. This is about sustaining productivity and creating greater capacity for focused and selective investment. Our second priority, product evolution. We are delivering new Xplan capabilities, including AI-enabled adviser workflow and productivity tools as well as a refreshed client portal. In our trading business, our partnership with Thoughtworks is supporting accelerated delivery of new data and insights features. If you'd like to hear more about this, we'll soon be sharing details of our product evolution showcase events to be held in the U.K. and Australia in November. Our third priority is AI-enabled products and productivity. We will accelerate adoption across Iress with a clear commercial focus and disciplined governance, translating AI capability into measurable customer value and improved productivity. And finally, customer-led execution. We will continue our strategy to deepen enterprise relationships through stronger strategic engagement and contract renewals while improving pipeline conversion through disciplined commercial execution. This will remain my priority and focus as we have much more work to do. I would like to leave you with 5 key takeaways today. First, we have delivered a solid first half financial result. Iress is simpler, stronger and more focused. Second, improved profitability and cash generation provide a greater financial flexibility, supported by disciplined capital allocation and a strong balance sheet. Third, our business efficiency program remains ahead of plan and we are on track to deliver our 25% FY '26 cash EBITDA margin Q4 exit run rate target. Fourth, product evolution is now in execution. We're accelerating delivery, strengthening engineering capability and increasingly focusing investment on measurable customer value. And finally, while revenue growth will remain measured as we evolve our platforms, we remain confident in our strategy, our FY '26 outlook and the long-term opportunity for Iress. Our priority is to build sustainable long-term value through the delivery of better products, stronger customer relationships, growing recurring revenue and building a higher-quality software business. We know trust is earned through execution and consistently delivering on our commitments. That remains our focus. Thank you for your continued support. Before we go to questions, I also want to acknowledge today's announcement regarding Cam. After 3 years as CFO, Cam will step down as we move into the next phase of Iress's strategy. On behalf of the Board, I want to thank Cam for his significant contribution and support through an important period of change. Cam will remain closely engaged through the remainder of the year to ensure an orderly transition. So with that, Cam and I are happy to take your questions.

[Operator Instructions] The first question today comes from Nick McGarrigle from Barrenjoey.

Just around the U.K. business, can you talk us through the project just at a high level that we cycled into 1H '26? And were there projects that were delayed as well that are still in the pipeline to pick up into the second half that carry through into recurring revenue into '27?

Nick, yes, look, there's a couple of things at play here. The recurring revenue in the U.K. is actually quite reasonable, relative to what we had in the prior year. That has seen a step-up in that. What has been the more significant drop-off is in the project and implementation work. As you may be aware, there was a significant client, that body of work was a multiyear exercise and that project has largely come to completion, albeit there are elements of that, that are now feeding into a go forward. But some of that sales cycle is longer than what we've seen in the past. So we are going through that with them at the moment. But the potential for the nonrecurring in the back end of this year, I would say, is quite limited, albeit we are looking at next year. The recurring revenue that we have seen in the U.K. has stepped up. We have had a couple of accounts that have landed in the first half of this year that you'll start to see come through in that revenue growth. So all in all, net-net, revenue in the U.K. is broadly flat, albeit revenue at the recurring level is growing and the nonrecurring isn't as strong.

And then just in terms of the TMD and the APAC Wealth businesses, can you talk through the mix between price and volume? Anecdotally, it felt like maybe volume churn was slowing down. So just reconciling the price rises versus the actual revenue-- continuing revenue print.

Yes. In both -- I'll start with the trading business. There was a little bit of churn that we saw. Volume was -- what I would say is more structural churn. We had a couple of exits in that business for people that were exiting markets, in particular, in South Africa. We had a little bit in Australia as well. What was sort of lost in all of that, there has been some momentum in new business wins and logos and the team has done a great job in the first half of this year in terms of getting momentum in that segment of the business. On the wealth side, the recurring revenue has been the key driver of that. That has -- we've had one significant project that sort of come to conclusion in the first half of this year. So the nonrecurring will start dropping off. But on the recurring side, substantially price, a little bit of volume. But for the most part, it's effectively a price story for the wealth business.

And I think in the past, we were working towards a pickup in intangibles CapEx towards like a 5% or 6% run rate of revenue. How should we think about that? I mean, you kind of guided us -- I think your comment was more around the software CapEx being 75% of what it was last year, but how to think about that picking up into the future periods once you get everything reengineered with Thoughtworks and have a different model?

Yes. The software R&D is roughly -- we should be around about the bottom end of that range through the course of this year, about 5% of revenue. Where we are seeing some of the CapEx drop-off is actually in the PP&E side, where we have actually had some office moves and incurred some PP&E that's going to be slightly lower this year than what we had last year. On the R&D front, a little bit lower. The pace of some of the delivery in the first half of this year, as you can see, was a bit slower than what we had at the back end of this year, but we are expecting that to ramp up as the year goes on. And where we finished the year, we've guided on a medium-term target of 5% to 7% of revenue. We're going to be at the bottom end of that range over the course of the year.

The next question comes from Cameron Halkett from Canaccord Genuity.

Can I start with just the first one around the D&A in the first half? You've made a comment there's some accelerated depreciation and a small software write-off. Are you able to confirm if there's a one-off amount in the half just gone, please? And if so, can you quantify that amount?

Yes, it's about $5 million, I would call out as impacting the first half on the D&A front, both a combination of a couple of projects that we've stopped. There was a little bit of R&D that was capitalized that we wrote off. The other component was actually to do with the Melbourne office lease, where we've actually moved office at the back end of June and we accelerated an onerous lease for the back end of 2026. So by and large, the D&A line for the first half is overinflated, probably to the tune of about $5 million that you'll see unwind as the year goes on.

Yes. That's really helpful. And the last one I've got is just around the cash EBITDA margin run rate exiting the year. Prior disclosures either had a plus symbol or a greater than symbol next to the 25%, just noting in this release that's dropped off. Can I just confirm that's purposeful or that's just a small oversight?