ReadyTech Holdings Limited (RDY) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to ReadyTech half year results conference call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Marc Washbourne, Chief Executive Officer of ReadyTech. Thank you. Please go ahead.

Thanks very much. Good morning, ladies and gentlemen. Thank you for joining us on the Conference Call for ReadyTech's Financial Results for the Year Ended 31 December 2019. I'm Marc Washbourne, CEO of ReadyTech. And joining me on the call today is ReadyTech's CFO, Nimesh Shah. For today's results presentation, I'll first provide an overview of our group results and key themes as well as a summary of the continued momentum we're making on our strategic priorities, which is focused on future growth. Nimesh will then provide details of our group financial results, including profit and loss, balance sheet, cash flow and segment earnings. I will conclude with the outlook for the year ending 30th of June 2020. On Slide 2 of our presentation, I'll start with an overview of the key operational and financial highlights for the period. I'm pleased to report that we have delivered a solid set of financial results for the half. Importantly, we have achieved our prospectus pro forma revenue of $35.1 million and EBITDA target of $14.6 million for the 2019 calendar year. Between the halves, ReadyTech exceeded the prospectus revenue forecast by 1% in the second half of FY '19 offset by a shortfall of circa $300,000 in H1 FY '20. This shortfall in H1 was related to a shift in the cross-sell of Esher House products from an anticipated Q2 to Q3 of FY '20. For the first half, pro forma revenue of $19.2 million was up 19.9% on the prior corresponding half. On an organic basis, pro forma revenue was up 13.2%. Underlying EBITDA increased 35.9% on the prior half and was up 28.9% on an organic basis. We continued to enjoy very high rates of client retention with client revenue retention of 95% while also increasing average revenue per client, which was up 8% on the prior half. We continued to generate strong cash with an operating cash conversion ratio as a percentage of EBITDA of 86%. As I explained at the full year results last August, an important metric in our business is the customer lifetime value to customer acquisition cost ratio. For the first half, the CLTV to CAC ratio was 7.2x compared to 6.9x for FY '19. Moving to Slide 3. I'd like to highlight some key achievements over the half. I'm really pleased to report that we have made significant progress in both our Education and Employment segments as well as in our corporate function. Of course, one of the key achievements was the landmark enterprise contract win with Bendigo TAFE and Kangan Institute for our flagship student management system, JR Plus. This is a $7 million contract with initial 5-year software subscription following a very thorough market evaluation by the client. The win validates our investment in innovative cloud-based and advanced technology, alongside our range of value-added services designed to penetrate larger, higher-value customers in the tertiary education segment. We continue to attract new and higher-value clients with the spend from new clients won 3.5x greater than that from clients that churned. We also increased our average revenue per client by offering additional modules, upselling greater value to clients and through overall increase in user subscriptions. Average revenue per client was up over 8% to $9,600 per client. Our strategy to increase cross-selling opportunities is bearing fruit with increased cross-sell, particularly of our Esher House product, winning multiple new contracts in the half. We continued our commitment to R&D with over $10 million invested during the year in new product development to deliver further innovation and value to customers. Acquisitions remain an important part of our overall growth strategy, and we successfully completed the highly complementary acquisitions of both Zambion and Wagelink in the half. Sales and product integration are progressing well, including the launch of HR3+, a unified payroll and workforce management system. Finally, we continue to invest in our people, which is fundamental to our success. As well as a strong focus on staff education and leadership programs, we are adding new talent in the critical areas of customer success, business development and enterprise contract delivery. In summary, we continue to deliver across all our strategic priorities during the half, which all work to create a very strong platform for ReadyTech for future growth. On Slide 4 is an overview of our group financial results. For the half, we continued to generate strong growth at both the top line and also in earnings for our Education and Employment segments. That's led to a 35.9% increase in underlying EBITDA for the half with underlying EBITDA margin at 43% compared to 39% for the prior half. As I said earlier, I'm also pleased to say that we have achieved our CY '19 prospectus targets of $35.1 million in revenue and EBITDA of $14.6 million on an organic basis. Nimesh will provide shortly a more detailed discussion of these financial results. In the meantime, I'll spend a few slides outlining our growth strategy in further detail. On Slide 6, in terms of what we do at ReadyTech, here's a short recap. ReadyTech is a SaaS provider of highly trusted mission-critical people management systems across both Education and Employment segments. And through these platforms and various SaaS business model, we have a 20-year track record of organic growth and uninterrupted profitability. Firstly, on Education. Within this segment, on Slide 7, our student management system, also known as an SMS, forms the central component of the modern tertiary education institution technology and the source of truth for student records, managing the full student life cycle from student acquisition and enrollment to graduation and alumni management. On Slide 8, JR Plus, our flagship student management system, is a cloud-based purpose-built platform to support the complex and evolving needs of Australia's enterprise-level tertiary education providers. This is the next-generation in student management system, which provides ReadyTech with significant competitive advantages and opportunities at large institutions that undertake digital transformation projects in the years ahead. The market fundamentals are supportive for the solutions we provide to this sector. Increasingly, customers are seeking agility and -- as well as flexibility to evolve technology and maintain ever-changing regulatory requirements. They also want to improve the overall student experience, and they need to do that in an efficient and productive manner, and our solution meets all these requirements. JR Plus is a pure cloud offering, which means we have agile development and regular releases via our subscription offering. One of the strongest endorsements of our product was the contract that we announced in January with Bendigo TAFE and Kangan Institute. Following an extensive competitive tender process, the TAFE chose JR Plus as its technology platform to manage the end-to-end student life cycle and evolve the student experience into the future. JR Plus will manage an expected 40,000 enrolled students annually at 10 campuses in Melbourne and across Victoria and will be used by more than 800 TAFE staff. The contract is valued at $7 million, including an initial 5-year software subscription. On Slide 9, across the tertiary education sector, we provide a range of market-leading technology solutions, including to TAFE, university, pathway providers as well as private education customers. On Slide 10, this slide gives you an appreciation of the significant opportunity we have in our addressable market in education. Within TAFEs and universities, we've been progressively demonstrating our credentials, which has led to key contracts such as the Bendigo, Kangan TAFE I mentioned on the previous slide as well as the University of Queensland last year. Of course, we continue to also maintain market-leading positions in the small to medium size of that market, which is predominantly made up of private colleges. In short, we see the industry as increasingly attractive with Australian tertiary education and training industry ICT spend expenditure at $1.85 billion for 2020. We remain well placed to grow our position in the key segments of this overall market. On to Slide 11, our other segment, of course, at ReadyTech is in Employment. And here, we provide mission-critical payroll, HR administration and workforce management solutions through our leading brands, which exhibit strong levels of trust in the market. These solutions target the mission-critical payroll function as the entry point for attracting loyal customers. Once our trusted and our advanced payroll is embedded into customers' workflows, they are more likely to add ReadyTech's HR administration and range of other modules to further boost productivity. On to Slide 12, across the employment market, we provide a broad offering of payroll and HR administration technology as well as managed services, and we increasingly target higher-value customers. On Slide 13, as you'll see in the half, we completed the highly strategic acquisition of Zambion to enhance ReadyTech's employment product offering. With the state-of-the-art cloud-based workforce management capability, which is, in essence, a time and attendance and rostering capability, ReadyTech has the opportunity to upsell this new module into our significant employment customer base. Since the acquisition, integration has progressed well, and we have launched HR3+ into the Australian market, a unified payroll and workforce management solution, which we are confident positions us to drive future growth with a higher average revenue per client offering. On to Slide 14, in terms of growth initiatives, we've a demonstrated track record of growth, and we expect this to continue by pursuing a range of opportunities to maintain those strong growth rates into the future. Let me briefly summarize our growth strategy. In technology, we continue to invest in R&D with an annual spend of over $10 million to deliver new innovation and value to our customers, which underpins long-term sustainable growth for ReadyTech. That includes additional features and modules. Now for Education, that includes student services, online enrollment and student engagement tools while innovating with market-leading new build features for the most complex clients, including mass scheduling, which is fit-for-purpose for international and higher education providers. In Employment, value-add adoption is being driven through new modules, such as time and attendance and rostering, onboarding, workplace, health and safety, business intelligence and employee self-service. For existing clients, we are focused on growing average revenue per customer by upselling our modules and cross-selling other value-added services, including new technology, such as workforce management via HR3+ and other modules as previously outlined. We continue to target winning high-value customers, and we have a current pipeline of over $14 million in potential opportunities. In Employment, we're targeting sectors with payroll complexity, such as retail and hospitality. The recent contract with large retailer, Glassons, is a good example of that approach. Finally, the business remains well capitalized to acquire complementary technology and/or new customer bases across both Education and Employment segments. ReadyTech will actively seek quality opportunities to buy, build and partner where adding additional functionality and services will deliver value for our customers and contribute to a return on investment for our shareholders. I'll now hand over to Nimesh to go through our financials in further detail.

Thanks, Marc. So on Slide 16 is the overview of the financial results for the half. As Marc say, it's a strong set of results. The total revenue was up 19.9% to $19.2 million. That was driven by a combination of new client wins and increased sales to existing customers. Organic revenue was up by 13.2%. You can see the benefit of our scalable platforms, where the increase in revenue translates to higher percentage in growth in earnings and underlying EBITDA, increasing by just under 36% to $8.3 million from $6.1 million in the prior half. That lift in earnings comes despite of our ongoing investment in sales and marketing as well as R&D to support top line growth. Underlying NPATA, which is underlying profit after tax, excluding acquired, amortization expense increased by 73.8% to $4.3 million. Turning to the segment results. Let me start with Education. Revenue increased by 11% on the prior half to $10.7 million. EBITDA was $4.8 million compared to $3.7 million in the prior half, which is up 30%. We have continued growth on strong client wins and greater spend by clients through customers using more of our modules across the ReadyTech platform. The upsell of Esher House to existing JobReady client base performed well with a strong pipeline continuing into this half. In the Education segment, the client lifetime value to CAC ratio also improved from 6.2x in FY '19 to 7.1x for the half. On Employment -- turning to Employment slide. Total revenue, including acquisitions, increased by 35% to $8.5 million. And on an organic basis, revenue was up 17% for the half with EBITDA margin remaining broadly consistent. We benefited from strong new client wins growth over the year. Spend from existing clients also improved from module uptake to targeted campaigns from our account management team. As Marc said, the integration of Zambion's rostering and time and attendance products are performing well and in line with our expectations. And for the Employment sector, the customer lifetime value to customer acquisition cost improved from 7.1x in FY '19 to 7.3x. Turning to Slide 19, which shows that ReadyTech continues to be highly cash generative with cash flow from operations increasing by 29% to $7.1 million. We had a minor impact on working capital from the shift in annual subscription payments of some key JobReady clients from Q2 to Q3 in FY '20 and -- which is just a timing difference. Cash flow conversion remained strong with an operating cash flow conversion ratio as a percent of EBITDA of 86%. Capitalized development costs and capital expenditure remained broadly in line with depreciation, amortization. On Slide 20, we talk about the capital structure. As disclosed at the full year in August, we successfully arranged new debt facilities, now totaling $27.5 million. We continue to have substantial headroom with these facilities and operate comfortably within our banking covenants. So now I will hand over to Marc to conclude with the outlook.

Thank you very much, Nimesh. On to Slide 21, turning to the outlook for the full year 2020. ReadyTech expects a FY '20 total revenue growth rate of approximately 20% with an organic revenue growth rate in the early double digits. We expect FY '20 underlying EBITDA margin to be approximately 40%. In the medium term, we continue to believe the changing nature of education and employment provides significant opportunities for the company. We're heavily invested in maintaining our forward-thinking culture to ensure that we stay open to innovative ideas and these opportunities so we can grow the value we provide, both for our customers as well as our investors into the future. Ladies and gentlemen, that concludes the investor presentation. We are now happy to take any questions.

[Operator Instructions] Our first question comes from the line of Mitch Sonogan from Macquarie.

Just a quick one, first up, on that outlook for sort of double-digit growth there. Can you maybe just touch across your thoughts for the 2 different divisions in the second half. Obviously, Employment had pretty strong organic growth in that first half of, basically, 17% than Education at 11%. Just a little bit more thoughts on how you're thinking there, that'd be great.

Yes. Thanks, Mitch. Look, we'd say to -- as a group-wide basis, low double-digit growth for the business. Across the segments, we see continued growth both the segments where, obviously, with -- we had an organic growth of 17% for this half Employment. We continue to see the upside growth going forward, in particular, with the integration with Zambion. I mean the pipeline is very strong. And on the Education side, once again, continued growth, obviously, on the win of the tertiary educations. As Marc indicated on the call, we've won Esher House upsells to existing JobReady clients. So that'll flow into the second half. The impact of BKI will be immaterial for this half because of, obviously, the accounting standards that will flow into the FY '21 financial year.

Okay. Great. And just touching on the pipeline $40 million that you note with high conviction. I guess just thinking about the recent TAFE contract win, does that change your priorities at all? And are there any expected costs required to maybe -- if you pursue more of those similar-sized contracts? And just in that same vein, can you sort of touch on what you're seeing in that part of the business in terms of tenders at the moment or maybe tenders you expect over next 12 months?

Yes. Great question. Thanks for that, Mitch. So yes, as in the deck, we have -- on a gross basis, over $40 million in the pipeline, and roughly 2/3 of that is in the Education segment. I think we certainly have had some strengthening of conviction. There are multiple, what we consider to be, enterprise deals that we're working on that are at various stages of progress as well as conviction. I think we'd certainly say that the win with BKI considerably increases our profile and exposure in the market. And we think that, that will be very helpful to continue to grow that pipeline. Priorities don't really change. This has been a strategic focus for some time. We are also -- we do feel, though, that there is further opportunity to invest in the whole go-to-market piece around sales and marketing, continue to attract further -- those types of customer. Of course, we're very attracted to those types of customer by the size of the contracts and also the quality of the revenue over time.