ReadyTech Holdings Limited (RDY) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the ReadyTech FY '21 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Marc Washbourne, Co-Founder and CEO. Please go ahead.

Thank you, and good morning, everyone. Thanks for taking the time to join our investor call. I'm Marc Washbourne, Co-Founder and CEO of ReadyTech. And with me today is ReadyTech CFO, Nimesh Shah. We are delighted to present to you today the company's FY '21 results that saw ReadyTech deliver strong growth in both revenue and earnings and provided further validation of our vision for next-generation people-centric software. Before I take you through our FY '21 results and growth outlook, I'd like to take a moment to thank the entire ReadyTech team, including those that have joined us this year from Open Office for their outstanding effort and contribution towards these results. I'd also like to personally acknowledge the Open Office founders, Phillip Simone and Peter Nanayakara for the exceptional spirit that they've brought in joining ReadyTech. It's been an incredibly busy and rewarding year, both in terms of organic growth and M&A, and these results are a testament to the dedication and belief of our entire team of ReadyTechers. Moving to the key operational and financial highlights on Slide 3. We've seen very pleasing growth and progression on all key metrics. Revenue grew 27.4% to $50 million, including the initial Open Office contribution of $4.8 million. Excluding Open Office, revenue growth was a healthy 15.1%. Underlying EBITDA was $18.9 million, representing an EBITDA margin of 37.8% and underlying NPATA was $10.6 million. Our levels of recurring revenue, customer revenue retention, cash flow conversion and gross opportunity pipeline are all notably strong. Slide 4 depicts our journey of progress over the last 4 years, and we have consistently delivered outstanding growth in recurring SaaS revenue and EBITDA and achieved a 20% CAGR in total revenue. Turning to Slide 5 and our strong momentum in new business. A core part of our strategy has been to target and onboard high value and enterprise customers. As a snapshot of our achievements over the year, we won 21 new high-value customers, each of those generating over $100,000 in annualized subscription and implementation value, equating to an aggregate annual value of $5 million across those 21 largest wins. Notable customer wins are shown on the right-hand side of the slide, and we're going to drill into these later in the presentation to explain the reasons that we are winning these high-value new business customers. We experienced a very solid finish to the year in terms of customer wins, and we've backed up now with a high conviction pipeline of $19 million. We are seeing abundant opportunities across tertiary education, local government, justice tech, state government as well as in the standup economy for our Workforce Solutions segment. With respect to Open Office, many of you will have seen our recent ASX announcement, where we were pleased to highlight that Open Office had achieved its first earnout in June, which was ahead of expectations. This was driven by new local government wins, upsell of modules to existing customers and successful rollout of the Ministry of Justice contract in the U.K. A key driver to underpin this new business, as well as cross-sell and upsell, has been our continued focus and investment in sales and marketing, which now represents 11% of revenue. That's up from 9.6% in FY '20. This planned and openly articulated strategy is clearly paying off. Now moving on to strategic execution, and I'll start with Slide 7. As many investors will be aware, ReadyTech delivers vertical market solutions to its customers across 3 main verticals: Education & Work Pathways; Workforce Solutions; and our latest market entry, Government & Justice. ReadyTech provides mission-critical SaaS solutions that are built to closely meet the specific needs of clients in these markets in which we operate. Our best practice SaaS approach is customer-centric. It's based on strong software usability and configurability, but not customization. We've developed high-performing customer-obsessed culture, spanning all aspects of the business from technology and product development through sales and customer success. Turning to Slide 8. Growth investments have been across 3 key pillars. Firstly, the cornerstone of our success at ReadyTech, product market fit. We're investing to ensure ever greater alignment to customer needs, and we created 14 new R&D roles in FY '21 with R&D representing now 31% of revenue and this serves to underpin long-term sustainable growth. The next pillar is go-to-market where we have grown sales and marketing and very deliberately are targeting high-value and enterprise customers. We added 7 new roles in FY '21. And to underline again, we have taken sales and marketing spend to 11% of revenue. Finally, scaling for efficient and streamlined operations to support this accelerated growth. We've invested in greater automation across the customer experience, as well as added 7 new customer onboarding and implementation headcount during the year. We include more detail under our growth initiatives for each pillar at the slides. Just some key callouts here, including the establishment of ReadyTech Academy to double down on technology and software skills as well as high-level engineers and the adoption of our enterprise sales book and account-based marketing best practice to drive that highly valuable enterprise customer growth. I'll now hand over to Nimesh, our CFO, for an update on the financials. Thank you, Nimesh.

Thanks, Marc. So on Slide 10, we provide an overview of ReadyTech's P&L. Total revenue for FY '21 grew 27.4% to $50 million. This included a [ 5-year ] contribution of Open Office of $4.8 million. Excluding Open Office, revenue was up 15.1% to $45.2 million. Subscription and license revenue was 87% of total revenue. Total revenue growth was driven by new customer wins, upsell and cross-sell to existing customers, resulting in average revenue per new customer of over $35,000 and significant license and module upgrades. Operating expenses grew in line with our stated strategy of investment in sales and marketing as well as R&D. Underlying EBITDA was $18.9 million, up 21.4% and included a $1.7 million contribution from Open Office. Underlying EBITDA margin was 37.8%, in line with FY '21 guidance of 37% to 39%. Turning to the cash flow and balance sheet slide -- balance sheet on Slide 11. ReadyTech is highly cash generative with $21.8 million in operating cash flow delivered in FY '21, representing 113% cash conversion as a percentage of EBITDA. This was supported by continued growth in customers prepaying annual subscription fees. We also conservatively geared. Net debt-to-EBITDA peaked at 1.2x at completion of Open Office transaction, which reduced to 0.86x by year-end. As I said in June, we have available cash for use of $18 million, which includes $6 million headroom in the debt facility. Now I'll hand over back to Marc to run through the detail of each segment, followed by strategy and outlook.

Thank you, Nimesh. Starting with Education & Work Pathways on Slide 13. This slide segment is a large vertical into defined addressable markets, really take up a strong pedigree in the private college and back-to-work markets where we are the clear market leader. We've had good prospects for growth across all markets, and we expect the strongest growth to come from the enterprise segment, which includes TAFEs and universities. Here, though we're earlier in our journey of customer acquisition, the pipeline is the most concentrated and conviction has been strengthened. Turning to Slide 14. In the Education vertical, ReadyTech is known for its student management system, which covers the full student life cycle, from student acquisition and enrollment through to graduation, placement and alumni. During the year, we integrated learning management into our product suite, supported by a tailwind of accelerated digital learning. Our growing success in this market comes down to our open ecosystem with superior interoperability for education institutions, our focus on student experience, modern cloud-based architecture and the high levels of configurability that allow for rapid deployment. On Slide 15, we highlight notable customer wins in the education vertical during the year. Key wins included: Commonwealth Bank's in-house training organization adopting our student management system; training provider, National Business Institute, implementing our learning management system; and a major win in the U.K. with back-to-work provider FedCap Employment, procuring our behavioral science capability. A consistent theme across these customers as to why ReadyTech won the business with our strong product market fit, the ease of integration with other systems and the scalability of our technology. In terms of segment financials on Slide 16, Education & Work Pathways delivered strong revenue and earnings growth. Revenue grew 16.9% to $24.9 million. Revenue was driven by strong new business, cross-sell and significant upgrades from existing customers. We see investment in the enterprise sales strategy paying dividends with a 42% growth in average revenue per new customer to just shy of $39,000. Also worth noting, our Bendigo Kangan TAFE project has progressed well with subscriptions being triggered and project scope expanded to reflect the additional requirements for the TAFE. Moving on to Workforce Solutions on Slide 18. In Workforce Solutions, ReadyTech operates in the payroll and HR technology space where $2.4 billion is spent annually on software and payroll outsourcing. Our key target is the standup economy where sophisticated requirements around workforce management exist. Targets include logistics, hospitality, aged and disability care, manufacturing, agriculture and retail. And we are very encouraged with our progress across these markets through the FY '21 year. On to Slide 19, ReadyTech offers an all-in-one software that is highly differentiated in the mid- to enterprise market. Our platform includes recruitment, onboarding, rostering, time and attendance, award interpretation, payroll and human resource management as well as the integrated reporting, all combined on one cloud-based next-generation platform. We are winning customers via our ability to replace disparate systems with a single vendor. We connect their data. We have a unified experience for our customers, and it's a highly trusted expertise in the areas of compliance and payroll that are also supporting those wins. Also worth noting that upsell to the all-in-one remains a significant opportunity here with average revenue per customer, often 3x higher than payroll only. On Slide 20, we call out some of the key opportunities that we converted during FY '21. These include major wine maker, De Bortoli; transport operator, TASCO Petroleum; the New Zealand grower, Bostock. Consistent across the 3 customers was the need and desire to replace legacy and separate systems with a cloud-based and integrated single vendor solution. Looking at the segment financial details in Slide 21. Workforce Solutions delivered another period of sustainable revenue growth with revenue increasing 13.3% to $20.3 million driven by strong new customer demand for the all-in-one platform and significant upgrades from existing customers. Similar to education, high value and enterprise growth is also coming through our Workforce Solutions business with a 19.7% increase in average revenue per new customer to over $39,000. Now moving on to our new vertical of Government & Justice on Slide 23, the large and highly attractive market we entered through the acquisition of Open Office. In this vertical, we provide citizen-centric software to local and state government as well as the justice sector. We see strong trends in digital transformation and migration to the cloud in these sectors and a particularly long runway of growth ahead. Of the 500-plus local councils in Australia, the 331 medium and large-sized councils are our key targets in this market. We view this segment as highly addressable given it's estimated that over 75% of councils purchased a core solution 10-plus years ago, and there exists an ever-growing need for next-generation technology. Justice is currently our next largest contributor. And here, we offer justice case management solution for courts, for prosecutors, tribunals, as well as commissions with customers in Australia and the U.K. as well as Canada, and we sell into a $211 million addressable market, and this represents another sector absolutely right for digital transformation. I won't go into too much detail on Slide 24 as many of you will have become familiar with the Open Office product set and the competitive advantage that we enjoyed over the past 6 months. In brief, Open Office is known for its community engagement platform that can be implemented as a full ERP or by individual module. Like ReadyTech software, Open Office wins through being people-centric, and in this case, citizen-centric. And that enables counsels to offer self-service access and a digital experience to those in the community. On Slide 25, we show key customer wins, including 2 notable wins for the period under ReadyTech ownership. In local government, major wins include Goondiwindi Council and Glen Innes Severn Council. In the Justice space, we've won a competitive process for the Legal Services Commission of South Australia. Consistent reasons we are winning come from offering a cloud-based and a highly configurable platform as well as a growing reputation and strong track record of successful customer implementations. Turning on to Slide 26. The Government & Justice part year contribution to ReadyTech's FY '21 P&L was $4.8 million in revenue and $1.7 million in EBITDA. Key operating highlights for the vertical include 99% revenue retention and the profile of new enterprise deals won during the year with average revenue per new customer of $145,000. I'm going to move now to strategy and outlook on Slide 27. And firstly, and for the first time, we are delighted to share our longer-term target for ReadyTech, which is to achieve organic revenue of over $125 million by FY '26. For FY '22, on Slide 28, we expect FY '22 organic revenue growth in the mid-teens with full 12 months FY '21 Open Office revenue being $18.3 million. EBITDA margin is expected to be in the range of 36% to 38%. Turning on to Slide 29. We expect to achieve our targets by continuing to drive momentum in the ReadyTech flywheel. Our strategy is centered on subscription revenue that supports continued reinvestment to achieve high product market fit, to retain existing customers and sales and marketing spend in order to acquire new customers. This, in turn, grows high-quality revenue, enhances our market position, allowing the business to scale, increase profitability and recycle again into reinvestment. This brings us to the end of today's presentation and Slide 30. To summarize the key takeout after a strong FY '21, we have a compelling $19 million pipeline of opportunities to pursue. The successful M&A acquisition of Open Office is performing ahead of expectations. Our sustainable revenue growth is underpinned by continued reinvestment. We are extending our products into international markets and our 5-year target is for organic revenue growth to more than $125 million by FY '26. Thank you again for your time, and I will now open for questions.

[Operator Instructions] Your first question comes from Mitch Sonogan from Macquarie.

Congrats on the results. Just a few questions from me. Just first of all, maybe starting on Education segment. That was a really, really strong result there, but even better when looking at the half-on-half results with second half revenue up 25% year-on-year and 12% half-on-half. Can I just talk through the drivers of that and how we should be thinking about the growth outlook into FY '22?

Yes. I might start with that, Mitch, and I'll let Nimesh add anything there. But yes, first of all, Mitch, you're absolutely right, the Education segment saw strong growth in the year and certainly into that back half. I think 3 key things. New customer wins were strong. We're certainly enjoying the benefits of our next-generation platform that's displacing legacy technology out there. We also had very good upsell. So we saw upgrades strong across the sector. Obviously, this is a large customer base, predominantly across the private college as well as higher education space. And part of that has been the addition of the learning management system, which we added last year, which has provided a really strong upsell opportunity. I think overall, that due to the fact that we do play in the domestic space and particularly the very strong weighting is towards the skilled space. Now that sector has actually seen strong government support, strong funding support. So the market itself has actually been buoyant, which has also been helpful. So I'll let Nimesh, if you'd like to add anything?

No. I think that's fair. But that's Marc -- on to that -- well, it reflects all the reasons for the growth in the second half. And Mitch, we've mentioned that we won 21 clients above $100,000. This is the enterprise strategy we have, and that's paying dividends and that will flow into FY '22.

Okay. Great. And then on Workforce Solutions, revenue was up 13% there, but EBITDA 2%. Can you maybe just talk through that from a larger perspective, what costs or investments you're making there and how we should think about margins in FY '22?

Yes. So Mitch, the Workforce Solutions, we continue to increase our investment in sales and marketing. This is a new [ badges ] business. You can see the volume's growth, particularly in the all-in-one platform. So we are very happy with the investment in sales as well as R&D. And I think that margins you have in FY '21, that will be maintainable -- that will be maintained in FY '22.

Okay. Great. And just maybe on that FY '26 target implies pretty consistent mid-teens organic growth that you have been delivering there. Can you maybe just flesh that out a little bit more? And I guess what gives you confidence or maybe what upside risks you see there? That would be great.

Yes. Great question, Mitch. So yes, look, I think, first of all, just really pleased to be able to put out a long-term target, such as the confidence we have in the growth prospects and the business model focused around reinvestment. So I think, first of all, the full year impact of Open Office and pro forma of that, we would be at $63.5 million. So what we're effectively saying is to -- $125 million is that we expect to double revenue -- organic revenue over 5 years. So that growth is really driven, Mitch, by the range of key strategic growth investments that we have. First of all, Education & Work Pathways. This is all about winning enterprise deals in TAFEs across higher eds, continued growth of upsell with areas such as Learning Management Systems and also our Work Pathways products, Workforce Solutions. This is, of course, the new clients onto the all-in-one platform, but we also enjoy this really strong upsell opportunity, as I mentioned, in terms of existing payroll clients. We expect really to see 2 strong sources of growth there. Local government is about winning medium to large local government clients. The pipeline is looking good. We feel very good about the differentiators that we have on the platform and the shift towards digital self-service for citizens. Justice Case Management, off the back of the expansion into courts and tribunals such as Fair Work Commission and the Ministry of Justice in the U.K., we see a significant growth runway there. Lastly, I think just important to note that international growth from the current 7% that we saw in FY '21, we expect to see that to grow to mid-teens over the next 4 to 5 years. We're already seeing the strong applicability of our products in some of these overseas markets. So we put all those growth drivers together across multiple markets, as I said, right, to digital transformation, and we back that up, underpin that with continued reinvestment into R&D. As Nimesh said, continued focus on increasing to sales and marketing and those large enterprise contracts, when you put all that together, that's what gives us the confidence to put out this FY '26 target metric.

Your next question comes from Michael Aspinall from Jefferies.

Several of your large customer wins appear to have gone through competitive tenders or RFP processes. Can you just give us a bit of a sense of how those processes progress?

Yes. Absolutely. Good to hear from you, Michael. Thanks for the question. And so you're absolutely right. Across education, as often in this environment, essentially semi-government as well as the Government & Justice, these processes do tend to be competitive, and they do tend to go to a formal procurement processes and include RFPs and RFTs. We have found that we've been able to continue to maintain a very strong conversion rate of around 60% across the year from opportunities that end up in what we call the high conviction opportunity in our growth pipeline. So we expect to continue to perform well in these. I think as I've outlined, we feel very confident around the product set, the very strong maturity of the product set and our cloud-based product set and certainly expect to continue to perform well in those competitive processes into the years ahead.

Yes. Okay. Great. And if I think about that pipeline, the $19 million, would it be fair to say that at least some of that or a large portion of that would be some way through those kinds of processes?

Yes. I think I expect a good number of those to be through that type of process. I think that you might see in -- particularly in Workforce Solutions, which are more in private businesses, that it's less likely they'll go through that sort of formal procurement process. They still often go through a very thorough evaluations. But certainly, a good number of those enterprise opportunities that make up that $19 million enterprise pipeline, we do expect to go through that type of tender process. And I think over the last few years, we've really built a very strong playbook as to how we actually compete in those and respond to those types of tender opportunities.

Yes. Great. And on R&D, it's now up to 31% of revenue, the investment income of product. In sales and marketing, you're investing about 11% of sales. How should we expect those metrics to progress in '22 and '23? Should we expect them to continue to -- the investments to continue to drift out?

We're very comfortable around this level, Michael, just around that 30%. It's been a historical number that we've aimed for. We think that if we maintain that -- around that 30%, that we can continue to grow that product market fit. Obviously, that at times means that we also extend our product set, are able to build new modules and offer new value to customers. So we see that as really the lifeblood of the business and really what underpins that really long-term sustainable growth. I think it's very important in technology that you do maintain that continued reinvestment back, continued modernization of systems as well.