ReadyTech Holdings Limited (RDY) Earnings Call Transcript & Summary

During our investor call, I'm Marc Washbourne, CEO and Co-Founder of ReadyTech. Joining me today is Nimesh Shah, ReadyTech's CFO. In advance of today, to let everyone know, I am recovering from the flu. Apologies in advance if my voice is not 100% clear. But we are delighted today to present the company's H1 FY '22 results, which already set continue its growth momentum and delivered another strong result. We see this as an outcome of the laser focus of the entire team at ReadyTech on delivering, implementing and supporting next-generation people-centric software. So before we begin with the formal presentation, I'd like to acknowledge the tremendous commitment and tireless effort of our team and executive at ReadyTech. The strong organic and M&A contributions we see in these results follow another busy period for our team, and I thank all of them for their inspiring work and dedication to our collective vision. Moving on to the key operational and formal highlights on Slide 3, where we have seen strong growth in all our key metrics. During the half, we saw like-for-like revenue growth of 16.8%, taking total revenue to $35.7 million. Note that in this like-for-like figure, we're capturing the organic growth in the business, which Nimesh will take you through in more detail later in the presentation. Underlying EBITDA increased to $12.9 million, generating an EBITDA margin of 36% or 37.2% (sic) [ 37.3% ], excluding LTIP. Underlying NPATA grew to $6.9 million from $4.7 million (sic) [ $4.2 million ] in the prior corresponding period. Net customer revenue retention was 97%, up from 96% in FY '21. Similarly, recurring revenue and cash flow conversion were maintained at high levels. Pleasingly, our gross opportunity pipeline has increased to $21 million, up from $19 million at the end of FY '21. Pipeline conversion was strong in the half with 22 new high-value customers won during the period. Slide 4 depicts our journey on a half year basis over the past 4 years. We have very purposefully targeted and consistently delivered outstanding growth in recurring subscription revenue with 30% CAGR growth. Turning to Slide 5 to provide more color on our growth. A core part of our strategy has been to target and onboard high-value and enterprise customers. The 22 new high-value customers converted during the half and by higher value, we mean those that generate over $50,000 in annualized subscription and implementation value equated to an aggregate annual value of $5 million. Notable high-value customer wins are called out on the right-hand side of the slide. We'll go into more details on the drivers of these customers' decisions to select ReadyTech later in the presentation. We expect the new business momentum to continue with a high conviction pipeline of $21 million with opportunities in progress across tertiary education, local government, courts & justice and in the standup economy workforce management. Many of you will have seen, we completed 2 highly strategic acquisitions during the half in Avaxa and open windows. Avaxa adds 2 key TAFE customers fortifying our market position within a strong growth vertical for ReadyTech in the Education segment. Open Windows add to procurement and contract management capability that will strengthen our ERP and also adds an upsell opportunity in the government vertical as well as bringing to ReadyTech more than 30 new local government relationships. Prudent growth in sales and marketing investment has also continued now representing 10% of revenue, up from 9.6% in the prior corresponding period. The investment focus here has been on enterprise and account-based marketing, enterprise sales and pipeline conversion. Now moving on to strategic execution, starting with Slide 7. As many investors will be aware, ReadyTech delivers high value to its customers, and we reinvest for growth across 3 key verticals, Education and Work Pathways, Workforce Solutions and Government & Justice. We provide our clients with mission -- apologies, we provide our clients with market-focused mission-critical SaaS solutions. Our shared best practice SaaS playbook is based on strong usability and agility and on configurability, not customization. Across ReadyTech, we focus on nurturing one high-performing customer and future focused culture that spans all aspects of the business from technology and product development through to sales and customer success. Turning to Slide 8. Our accelerated growth has been achieved through ongoing investment across 3 key areas: Firstly, product market fit, in developing focused product alignment for superior customer retention and acquisition, we created 9 new R&D roles in H1 FY '22 with R&D representing 31% of revenue. The addition of Open Windows significantly elevates our local government product market fit with the new procurement capability. The next area of investment is go-to-market where we have grown sales and marketing to target high-value customers. We added 5 new roles in the half, taking sales and marketing spend to 10% of revenue. Avaxa also amplifies our reputation and credibility in the TAFE sector. And finally, scaling for efficient and streamlined operations to support our accelerated growth, we added 8 new customer onboarding and implementation hedge during the half and delivered strong progress on customer onboarding, self-service and automation initiatives. Some of the key talent we hired is shown at the bottom of the slide, and this talent is of a very high quality. In the interest of moving on to the numbers, I won't call out each of them. Suffice to say, these hires are designed to support the next leg of planned growth at ReadyTech and are each adding tremendous value to the business. So now over to Nimesh, our CFO, for an update on the financials.

Okay. Thanks, Marc. On Slide 10, we provide an overview of ReadyTech's P&L. It's worth noting that earnings are presented on an underlying basis, unless otherwise stated, with adjustments from statutory to underlying figures shown at the bottom of the slide. In addition, references to like-for-like underlying items include pro forma Open Office financials for the first half of FY '21, comparative period and excludes the contribution of a back end Open Windows in the first half of FY '22 and in order to capture the organic performance of the business. Total revenue for the first half of FY '22 was $35.7 million or $35 million on a like-for-like basis, which is a growth rate of 16.8%. Subscription and license revenue was $30.3 million, representing 85% of total revenue. Like-for-like basis, subscription revenue was $29.8 million, growing at 23.3%. Planned Growth in operating expenses continued, including sales and marketing cost growth of 40% with 10% of revenue, up from 9.6% compared to the prior period. An annualized R&D cost of $21.1 million, which is up from $15.4 million in FY '21, representing 30.5% of revenue. Underlying EBITDA of $12.9 million represents a margin of 36% to exclude the share-based payment of LTIP, EBITDA came at EUR 13.3 million, which is a margin of 37.2% (sic) [ 37.3% ]. Turning to Slide 11. ReadyTech remains highly cash generative and maintained a conservative balance sheet to support further growth. As of 31st December 2021, we have available cash for use of $11.3 million, including $7.8 million in cash and equivalents and $3.5 million debt facility headroom, $34 million currently drawn. We maintain a conservative gearing ratio of 1.1x. Operating cash flow for calendar year '21 was $26 million, representing a 108% conversion as a percent of EBITDA. With respect to cash flow, no business represented on a calendar year basis, due to second half cash conversion being historically higher, especially in the Government & Justice segment compared to the first half, and this is it due to the -- on the back of timing of annual billing cycle. I will now hand over to Marc to take you through the performance by segments, followed by strategy and FY '22 outlook.

Thank you, Nimesh. Now on to the segment updates, starting with Education and Work Pathways on Slide 13. This slide breaks the vertical into identified addressable markets where there remains significant opportunity. Our Education business was built in the private college and back-to-work markets where we are the market leader and continue to generate strong growth. A key part of our strategy has been penetrating the enterprise end of the tertiary education market and specifically, TAFE. And with the acquisition of Avaxa, we now have 3 reference clients with Chisholm and Melbourne Polytechnic, complementing our existing landmark client in the Bendigo and Kangan Institute all of which provides a strong platform for future growth. Turning to Slide 14. In the education vertical, ReadyTech's core offering is a student management system, which covers the full student life cycle from student acquisition and enrollment through to graduation, placement and alumni management. We continue to win customers due to our open ecosystem, modern cloud architecture, high configurability for rapid deployment, our local expertise and superior student experience. Over the past 12 months, we have introduced a feature-rich learning management system, or LMS, into our product suite that is now generating significant traction in the marketplace. For existing clients that have taken LMS, we are seeing increases in annual revenue of more than 2x. On Slide 15, we highlight our expanding customer base with recent education and work pathways wins. These include enterprise training organization, Australian Pacific College employment services provider Workways and tertiary education provider, Avondale University. Consistent across the 3 customers as to why they chose ReadyTech was our advanced platform, well-established and proven track record of delivery and depth of integrations that are fit for the institutions technology ecosystems. Education segment financials are provided on Slide 16. We experienced an acceleration with revenue growth of 27% to $14.9 million driven by substantial new business as well as the upsell of LMS. This also included a part period a $0.6 million revenue contribution from Avaxa. Recurring revenue grew 21.4% to $12.6 million, and we achieved net revenue retention of 97% through successful customer engagement, reflecting high value and enterprise wins average new revenue per customer was $52,700, up from $45,800 in H1 FY '21. And importantly, we expect continued growth through high-value qualified leads in the tertiary education and Work Pathway sectors. Now moving on to Workforce Solutions on Slide 18. In this vertical, ReadyTechers a large addressable market of $2.4 billion. Our key focus remains the standup economy, which includes Logistics, Hospitality, Aged & Disability Care, Manufacturing, Agriculture and Retail. This targeted industry vertical strategy enables highly efficient customer acquisition by targeted sales and marketing activity. Now on to Slide 19. In Workforce Solutions, ReadyTech offers all-in-one platform that's highly differentiated in the mid and enterprise markets. This platform includes recruitment, onboarding, rostering, time and attendance, awards interpretation, payroll, HRM and advanced reporting all integrated onto one next-generation platform. To enhance product market fit, our focus for 2022 is on the employee experience to further assist our customers in engaging and retaining their talent. We continue to win new customers based on high trust in the market, ability to replace legacy and disparate systems with a single vendor, connected data and our deep expertise in compliance. Finally, it's worth noting that upsell to all in one remains a significant opportunity with average revenue per customer 3x higher than payroll only. On Slide 20, we call out some of the key customers converted during the half. These include the Auckland Theatre Company, Major Agri-grower, Trevelyan Pack & Cool and hotel operator, The Langham. A consistent theme across these customers was the need to replace older and separate systems with a single vendor cloud platform with ReadyTech also winning on that all-important compliance capability as well as workflow automation to drive efficiencies. Turning to segment Financials, details on Slide 21. Workforce Solutions delivered 10.3% revenue growth to $11.1 million driven by new all-in-one customer wins and significant upgrades from existing customers. The value in the consolidated platform is evident in average revenue per new all-in-one customer of over $116,000, which drove average revenue calculated across all new customers to record levels. EBITDA performance for the segment reflected continued investment in onboarding with 5 new roles, expanded research and development spend with a focus on the employee experience previously mentioned as well as sales and marketing. Now turning to Government & Justice, starting with government on Slide 23. Where we see continued digital transformation tailwinds and migration to the cloud. In local government, we target the 331 medium- to large-sized councils of the 530 local councils in Australia, which we view as highly addressable given either 75% of councils are estimated to have purchased a core solution 10-plus years ago. Moving on to Slide 24. Our Local Government solution is known for its community engagement platform that can be implemented as a full suite ERP or by module. The strategic acquisition of Open Windows strengthens the ERP offering and provides a new module upsell opportunity through its market-leading contracts and procurement management capability. In the government sector, we win new customers through our citizen-centric approach, our cloud-based modular architecture, high configurability and a strong track record of customer implementations. Justice on Slide 25 presents a major global growth opportunity. Domestically, our citizen-centric Justice case management solutions service a $250 million market across courts, commissions and legal services, tribunals and public prosecutors. The product has high portability into offshore markets, including the U.K., Ireland, Canada, New Zealand and the Pacific Islands on the back of our successful Ministry of Justice Project in the U.K. Our best-of-breed justice solution is winning customers given our domain expertise, again, our modular approach, our local presence and accelerated time to go live. Turning to Slide 26. We made continued progress in winning new customers in both Government & Justice. During the half, we converted local government customers Town of Claremont as well as Oberon Council, where our contemporary true cloud SaaS solution and customer-centric approach shown through. In addition, we won a major contract with the Fair Work Commission for Justice case management on both the quality of our technology and our planned approach to the customer implementation. Financials on Slide 27 show Government & Justice made a significant contribution for the half, with like-for-like revenue growth of 19.3% to $9.7 million. This was underpinned by 62% growth in subscription revenue to $8 million with recurring revenue now 81% of segment revenue compared to circa 60% for the pro forma H1 FY '21 period. Importantly, growth is expected to continue with the Government & Justice gross pipeline of $9 million. Consistent with the enterprise nature of the vertical average revenue per customer was $254,000 in H1 FY '22. This was up 75%, driven by module upgrades to existing customers and new customer wins. Another key highlight is revenue retention which remains at 100%, reflecting high customer loyalty and the mission-critical nature of the product. Moving on to strategy and outlook on Slide 28. We remain well positioned to deliver long-term sustainable growth, and we increase our FY '26 organic revenue target to over $140 million to incorporate the recent acquisitions of Avaxa and Open Windows. For FY '22, on Slide 29, we reiterate our outlook for organic revenue growth in the mid-teens. The recent acquisitions of Open Windows and Avaxa are expected to deliver incremental revenue of $2.2 million at an EBITDA margin of 16%. At a group level, EBITDA margin for FY '22 is expected to be in the range of 36% to 38%, excluding the impact of LTIP. To close with key takeouts on Slide 30, after a strong first half, we have a robust and growing $21 million pipeline of high conviction opportunities to pursue. With product market fit, focused on enterprise customers. We continue to invest strongly in R&D as the fuel for long-term sustainable growth. Investment in talent to underpin future growth also continues across go-to-market and customer onboarding to meet the demand from new customers, and our strong track record of disciplined and successful M&A has continued. Lastly, we are well positioned to achieve organic revenue of over $140 million by FY '26. Thank you for your time once again, and I will now open the call for questions.

[Operator Instructions] The Next question comes from Jules Cooper from Shaw and Partners.

Just 2 for me. So the increase in the long FY '26 revenue target to $140 million, is it big increase when we think that those acquisitions of Avaxa and Open Windows, I mean, give or take, $4 million, and we've got an increase there of $15 million. I wondered if you could maybe just talk about it feels like your -- there's a growing confidence in the base business as well as just including those acquisitions? Are we right in thinking that? Maybe if you could just talk to those things that are sort of underpinning your confidence in that number? And then I've got a follow-up.

Yes. No, good question, Jules. Look, we -- Open Windows, we say we embody that the revenue for this year on a full year basis, around $3.3 million, Avaxa around $2 million, all together it's $5 million as an opening balance on a common basis. But when we look at the next 4 years, look at the projections of that acquisitions and being through the ReadyTech playbook, we're very confident that to grow -- that higher than the mid-teens growth that we expect for ReadyTech and can go through the reasons fire. But every -- we have done that before. We bought Zambion, as you know, Jules, and we've grown that revenue with 2x over the last 3 years. So confident, look at the strategic rationale of those acquisitions. So we add that to the what we had taken at the last half, $125 million, we put that in with a revised $140 million and to some $140 million.

Yes. Okay. All right. No, that's clear. And I guess just on the cash conversion. So over a 12-month rolling basis, strong as always, when you particularly just look at the first half, maybe a little softer than what -- and off the back of a very strong second half '21, could you maybe just provide a sense for -- as you look out, you see the different movements in the working capital line, what do you think that conversion as a percentage of EBITDA might be for the full year?

Yes. Look, I think it's a good question. Yes. We presented the CY '21 because CY '21 conversion of 108%. We do have a stronger collections in the second half. Remember, these clients predominantly paid 12 months in advance and the new billing cycles, particularly for Government & Justice tools fall in the second half. So for the full year, we are very confident that the conversion will be greater than 90%, if not more. It's just the timing impact. You have to remember, full FY '21, in fact, had the second half of Open Office. We don't have that this half. But again, we're very confident that we'll be better than 90% for the full year.

Your next question comes from Wilson Wong from Jarden.

Just following on from Jules' question, what growth rates are you actually assuming for Open Windows and Avaxa over the next 4 years roughly?

Yes. Look, we expect that we will say mid-teens all of the segments, this one is probably been the high-teens on the growth rate, and it's doing really well. And if you look at what one of the key things for the half, right, and we've said that at the time of acquisition is we want to convert the nonrecurring revenue to recurring, and we've now made for the half 81% of common adjusted is recurring. And they've already had the timing impact in spite of that, it delivers the growth rate. So we expect that growth rate continue throughout the year to [indiscernible].

Sure. Great. Just on the growth opportunity pipeline, so that incremental $2 million. So which segments did that come from? And sort of what conversion rate are you serving for that $21 million?

Yes, thanks for the question. It's Marc here. So look, the additional $2 million has come from a range of segments and verticals across the business, partly at the acquisitions, of course, came with some pipeline. So that explains some of it. But we are particularly seeing strong growth in the pipeline in the Government & Justice side of the business, probably with a weighting towards Justice. So spread quite well across with the weighting towards Government & Justice, I think, is the answer.

And just on the conversion rate and sort of what...

Sorry. I'll just answer that follow-on question, yes. So look, over the last 12 and 18 months for opportunities that fall into that pipeline, the high conviction pipeline. We've seen conversion rates of around 55% to 60%.

Right. And just in terms of -- are you seeing any wage cost pressures particularly on the R&D front. So out of those 9 year roles, sort of, I guess, if you were to compare the cost of hiring them sort of, I guess, recently versus historically, what does that look like?

Yes, I think that -- I think it goes without saying that it's a tight talent market. We're seeing skill shortages. We're certainly not immune for that. I think that we've been able to navigate that well, particularly with the new team. I think that certainly seeing that people are choosing to stay at ReadyTech. We have a really great culture. We've really flexibility. We are very competitive -- we think we have competitive compensation as well. So when we have gone out to market for new roles, at times, we have seen in the inflated salaries from where they were previously. We also benefit from the fact that we -- with a very dispersed team not only have roles here in Australia, but also in overseas development centers where we're not slightly at the same level of wage inflation as we're seeing in domestic level.

Your next question comes from Michael Aspinall from Jefferies.

So I just wanted to ask one slightly different slightly different perspective on the pipeline. I mean, if we take the $5 million of annual value of high value customers you converted in the half. And there's been kind of at least $7 million pros in the pipeline and more if you adjust for that conversion rate you just mentioned, I'm just interested in if the reasons those customers are seeking new products has changed at all or what the underlying driver of those customers seeking to shift to potentially realter another product?

Yes. Michael, I think that if there's one silver thread that runs through all of it, it is replacement of some form of legacy technology. We think that across all our segments, we see in education, we see it in TAFEs. We see in a local government, we see in justice. Many of these organizations that select core system many, many years ago. And for a whole range of reasons, they've outgrown that system, either it's noncloud-based system, it has disconnected and disparate systems that they would like to have an all-in-one platform, essentially have a less modern user experience and also poorer interoperability. So for the most part, these organizations are going through a large replacement of technology going through their own form of digital transformation. And it's that key trend that we think not only provides growth into the next year but into many years ahead.

And Mike, I'll add one more thing. If you look at the value of new customers, for the half was around just shares of $60,000 compared to on a PCP basis, $42,500 last time, which is a 40% increase just on PCP a value of new customers. And then even what Marc said, we're going to the higher value enterprise customers, which are very good for the long-term last time of the organization.

Great. I mean kind of a follow-up, your net revenue retention increased to 97%. Underlying that, can you give us an idea of what churn looks like and what kind of the value uplift from existing customers looks like?

Yes. Great question. Look, I think 97% of the net revenue retention, gross revenue retention mark is around 104%. We win that through land and expand of existing clients, selling more modules cross-selling and logical products. There's also growth of licenses as well coming across all of the segments. Work Pathway to an example when you're sending more licenses on those products. So our total growth -- if you look at source to growth, 2 new baggage is 40%, but we're still maintain around 40% coming through its existing clients.

Great. That's really helpful. And then the last one for me. What are you seeing in terms of acquisition opportunities? Should we expect to see anything further in FY '22? And do you see as you continue to grow kind of presence or profile growing in the community such that you're seeing people reach out to you with opportunities?

Yes. Fantastic question. So look, first of all, we do continue to maintain an active pipeline. We think that we've become very good at identifying strategic acquisitions and then executing on those and integrating those. I think our track record demonstrates that very well. So look, we continue to maintain an active pipeline. They are weighted towards opportunities where we can acquire for a customer base and transition them to our technology also for complementary technology that can enhance our product suite and provide an upsell opportunity. So I should certainly expect that story to continue, we think, into the rest of this calendar year.

And Michael, we -- the other point is we -- the profile grows in terms of origination, we do get lots of inbounds, Marc and I, for M&A opportunities and we see that increase over the last 4 months. And we have a new mandate as you know, deal structures and all so things yes. it's quite buoyant from that perspective.

Your next question comes from Cameron Halkett from Wilsons Advisory.

Can I just check if you hear me okay?

Yes, we can hear you, Cam.

Loud and clear, Cam.

I've really kind of just got one, going to focus a bit more on near term, just around guidance, in particular, revenue if I do a bit of back-of-the-hand math in terms of organic growth requirements to achieve that mid-teens growth rate. It kind of only implies that the second half requires an incremental $2 million of revenue. But if we talk about how strong the pipeline is as well as some of the investments you've made in other segments, it seems quite an easy target. So I'm just curious around your thoughts on revenue guidance going into the balance of the year.

Cam, good question. Look, we did 16.8% organic growth like-for-like basis and with a $21 million pipeline, we seem to continue can accelerate our growth rate. We're just being prudent. We maintained the FY '21 guidance, just been prudent going beyond, we will continue and accelerate growth.

There are no further questions at this time. I'll now hand back to Mr. Washbourne for closing remarks.

Thank you to everyone for joining today. As I said at the top, very pleased to deliver these strong results. Very excited about the future ahead for the company and the opportunity in these large and very open markets in which we operate. We look forward to meeting many of you again in the coming weeks. Thanks for joining.

That does conclude our conference for today. Thank you for participating. You may now disconnect.