ReadyTech Holdings Limited (RDY) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the ReadyTech Holdings Limited FY '22 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, sir.

Good morning, everyone. Thank you for taking the time to join our investor call. I'm Marc Washbourne, CEO and Co-Founder of ReadyTech. And with me today is Nimesh Shah, ReadyTech's CFO. We are pleased to present the company's FY '22 results, which saw ReadyTech achieve guidance and deliver another year of strong growth. These results come as our reputation across our markets builds as the vendor of choice for highly configurable, interoperable and scalable cloud-based software, coupled with our customer-centric approach. Our financial results are also an outcome of the tremendous efforts of our people. So before we begin the formal presentation, I'd like to thank our team of ReadyTechers for their outstanding commitment and contribution through another busy year of organic growth and M&A activity. So with that, let me begin now with the key operational and financial highlights on Slide 3. The standout metric for FY '22 was the delivery of 16.8% like-for-like growth to $78.3 million in revenue. Underlying EBITDA was $27.5 million with an EBITDA margin of 35.1% or 36.5% with LTIP being excluded. Underlying NPATA was $14.3 million, up from $10.6 million in the prior year, and net customer revenue retention after churn and including expansion with existing customers was 106%, up from 104% in FY '21. We have a strong gross opportunity pipeline of more than $25 million as at the 30th of June. Pipeline conversion during FY '22 was particularly pleasing with 48 new high-value customer wins with strong success at the enterprise end of the market, producing 46% growth in revenue per new customer. [Technical Difficulty]

Ladies and gentlemen, please stay connected. We have lost the connection from the management. Ladies and gentlemen, the management line is connected again. Sir, you may proceed.

Thank you for reconnecting it, I'm afraid we had a Tech issue. We have reconnected via our mobile phone. So I think I was up to Slide 4, which depicts our sustained performance over the past 5 years. We have consistently delivered outstanding growth in high-quality recurring subscription revenue with a CAGR of 27%. Turning to Slide 5 and some of the strategic and operational achievements of the year. We had a significant windfall on new business with the addition of 48 high-value customers, each generating over $50,000 in annualized subscription and implementation value, delivering an aggregate annual value of $8 million. To the right-hand side, you can see some of the new badges acquired at enterprise level, including major hotel groups, blue chip by corporates such as Wesfarmers and government customers, including trading services in New South Wales, the City of Melton and TASCAT, the Tasmania Civil and Administrative Tribunal. We expect this new business momentum to continue with a growth pipeline of more than $25 million in high conviction opportunities, well distributed across tertiary education, local government, justice tech and the stand-up economy for Workforce Solutions. Notwithstanding the strong organic results, M&A was a feature of FY '22 to ReadyTech with 5 with -- apologies, with 4 strategic acquisitions in AVAXA, Open Windows, PhoenixHRIS and IT Vision, and I will cover the value that these businesses have brought to ReadyTech later in the presentation. Now moving on to strategic execution, starting with Slide 7, where we depict our vertical SaaS playbook. We operate our business across 3 key verticals: Education and Work Pathways, Workforce Solutions and Government and Justice. Each of these verticals and any acquisitions are managed and integrated across our shared SaaS platform and best practices. These are based on fundamental principles of customer centricity, usability, configurability and interoperability. We empower and motivate our teams, spanning technology and products, sales and marketing, customer service and success with one high-performing ReadyTech culture. Turning to Slide 8. Our accelerated growth has been achieved through ongoing and disciplined investment across 3 key pillars. Firstly, absolutely critical in vertical SaaS, product market fit. In developing products, alignment to customer needs and a strategic focus on enterprise market fit, we created 17 new R&D roles in FY '22 with R&D investment at 32.5% of revenue. On top this strong investment in product the procurement capability added through the acquisition of Open Windows has elevated market fit in local government. While the PhoenixHRIS talent acquisition module has strengthened our offering for the standard economy in Workforce Solutions. In terms of our second area of investment, go-to-market, we have purposefully grown sales and marketing to target high-value customers and increased sales and marketing roles by 30%, while also expanding our network of strategic partners and channel strategy. The AVAXA acquisition has also significantly amplified our reputation and credibility in the TAFE sector with our customer set now including 3 of the 4 largest TAFEs in Victoria. And the final area of investment is scaling to underpin our vision of long-term sustainable growth, 17 new customer onboarding roles were added during the year to manage new customer demand. And we also made excellent progress across a range of initiatives to support the streamlining of our operations, including customer onboarding automation, customer self-service and the leveraging of implementation partners. Across this disciplined and determined strategy of reinvestment for future growth, overall, 42 new roles were added across ReadyTech for the year. I'll now hand over to Nimesh, our CFO, for an update on the financials.

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 shown at the bottom of the slide. In addition, references to like-for-like items compared to contribution from FY '22 acquisitions first of the AVAXA, Open Windows and Phoenix against the respective prior corresponding period as well as including Open Office on a 12-month pro forma basis in FY '21, like-for-like captures ReadyTech organic performance. Total revenue for FY '22 was $78.3 million, growing at 56.5% or 16.8% on a like-for-like basis. Subscription and license revenue was $65.6 million, representing 84% of the total revenue and up 21.9% on a like-for-like basis. Revenue growth was driven by new customer wins resulting in average revenue per new customer of nearly $60,000 driven by significant upsell to existing customers, user licenses and modular prices. The part contribution of the acquisitions of AVAXA,Open Windows and Phoenix contributed $4.3 million of revenue, including $3 million in subscriptions. Underlying EBITDA of $27.5 million represents a margin of 35.1%. Excluding LTIP of $1.1 million, underlying EBITDA was $28.6 million with a margin of 36.5%. Turning to Slide 11 and a summary of balance sheet and cash flow. As at 30th June 2022, available cash for use was $12.8 million, including $9.2 million in cash and equivalents and $3.5 million debt facility headroom, given the company's $37.5 million facility was drawn to $34 million. Post year end, an additional $12.5 million bank facility was obtained following the completion of acquisition of IT VIsion. 40% of the total $50 million now gross facility going forward has been hedged with an interest rate swap. Adjusted net debt was $25.9 million, equated to the leverage ratio 0.9x. During FY '22, it's worth noting $8.8 million of company cash was used by acquisitions of AVAXA, Open Windows and for Phoenix. In terms of operating cash flow, $25.5 million in operating cash flow before interest and tax was generated for the year, representing an 89% conversion as a percentage of underlying EBITDA, supported by continued growth in customer prepaying annual subscription fees. Now I'll hand over back to Marc to take you through an update by vertical or segment followed by strategy and outlook.

Thank you, Nimesh. I'll start with Government & Justice, given it is now our largest segment following the completion of the IT Vision acquisition, which I'll cover in more detail in a moment. . Firstly, focusing on government on Slide 13, where digital transformation headwinds and migration to the cloud continues to be a key driver for our business. In local government through the combination of IT vision and Open Office, we now reach 270 of 530 local councils in Australia. And we continue to view the market as highly addressable given that over 75% of councils purchased a core solution, 10-plus years ago. We cover the strategic rationale for the IT Vision acquisition on Slide 14. I appreciate there is some detail on this slide, but at a high level, this transaction has enabled us to become one of the leading government software providers by volume. IT Vision meets our hurdles on the mission-critical nature of the product and the stickiness of its customer base. We have an opportunity to concentrate R&D resources and optimize product market fit and also capture new upsell and cross-sell opportunities. We expect to enjoy a range of benefits of scale and significantly expand go-to-market activities. And of course, we are excited to welcome IT Vision's highly talented team to ReadyTech, who bring deep expertise in local government. Now on Slide 15. The key benefit of this combination is a significant expansion in our footprint and market penetration across Australia. IT Vision has an incredibly strong position in WA and SA, and has been building momentum in Queensland, whereas the traditional base of ReadyTech local government has been Victoria, New South Wales and Tasmania. Some of the key talent I referred to earlier includes Nigel Lutton, CEO of IT Vision, backed up by a very strong management team with all key individuals highly incentivized for integration to ReadyTech and growth in both subscription revenue and EBITDA. Moving to Slide 16. In the government sector, we win on citizen centricity, our cloud-based modular architecture, high configurability and a strong track record of customer implementations. In this vertical, ReadyTech is known for its community engagement platform and this vision remains unchanged as we optimize the local government product set alongside IT Vision. The acquisition of Open Windows has now been fully integrated, strengthening both our holistic ERP offering and mutual upsell opportunities through its market leading, contracts and procurement management capabilities. Justice on, on Slide 17, continues to present a major global growth opportunity. Domestically alone, our citizen-centric adjusted case management solutions service a $250 million market across courts, commissions and legal services, Tribunals and public prosecutors. On top of that, the product suite has high [portability] into offshore markets on the back of our successful Ministry of Justice projects in the U.K. Our best-of-breed solutions are helping acquire new customers via our domain expertise, our modular approach, local presence and accelerated time to go live. Turning to Slide 18. The ReadyTech Justice product to manage schedule and listings is now live across more than 140 Ministry of Justice sites across the U.K., providing very strong evidence of our ability to scale with the rollout to 4,500 users across the judiciary. Our next module for the MOJ resource management is expected to go live in the first quarter of FY '23. The feedback on this project is that it's been a resounding success. And we are getting overwhelming positive feedback from users. We believe this places ReadyTech in very good set for future expansion and overseas opportunities. Government & Justice segment delivered revenue growth on a like-for-like basis of 18.6% to $23.9 million. This was underpinned by 33% growth in subscription revenue to $19.6 million, with recurring revenue now 76% of total revenue compared to approximately 65% in FY '21. Open Office was the main contributor to these results, and Open Office recently achieved its second and final set of earnout hurdles in the space of less than 18 months, which now provides an excellent platform for the integration of IT Vision. The Open Windows acquisition is also performing well, as expected, having contributed $2.3 million of revenue since our acquisition in December 2021. Reflecting the enterprise nature of deals in this segment, average revenue per new customer was $186,000, up 15.4%, driven by module upgrades to existing customers and winning customers across local and state government as well as the justice sector. Now moving on to Workforce Solutions on Slide 21. In this vertical, ReadyTech operates in a large addressable market of $2.4 billion. Our key focus remains the standard of economy, traditionally known as blue collar, which includes logistics, hospitality, age and disability care, manufacturing, agriculture and retail. This targeted industry vertical strategy enables highly efficient customer acquisition via targeted sales and marketing activity. We also have been developing a channel part strategy, which is paying dividends on both customer acquisition and the scalability of onboarding new customers. Turning to Slide 22, in Workforce Solutions, ReadyTech offers an all-in-one platform that is highly differentiated in the mid-enterprise market. To further strengthen product market fit, a current focus is on elevating the employee experience to assist customers in engaging and retaining their people. The integration of PhoenixHRIS is also tracking very well with this acquisition significantly enhancing our recruitment on onboarding capability and providing a particularly strong upsell opportunity. In this segment, we win on trust and compliance, ability to replace legacy disparate systems with a single platform and fully connected data. Finally, it's worth noting that upsell to the all-in one remains a significant opportunity in this segment with average revenue per customer 3x higher than payroll only. On to Slide 23. To illustrate just one example of the targeted industry vertical approach, we demonstrate here the great success we are enjoying in the hotels and accommodation sector with recent landmark wins, including Novotel, Stamford, ibis and Gallery, the Langham and Pullman. In addition to some of the previously mentioned benefits of the all-in-one system, hotel clients have been choosing ReadyTech for our strong employee service capability and to facilitate the ease of staff movements across multiple properties. In terms of Workforce Solutions segment performance on Slide 24, we saw an accelerated revenue growth of 15.8% to $23.5 million, which includes software revenue growth of 20.7% to $15.4 million. This was driven by new customer wins on the all-in-one platform across our targeted industry verticals and significant upgrades from existing customers. Note here that we haven't made the like-for-like adjustment as PhoenixHRIS, which was acquired late in the financial year, made a modest contribution of $0.3 million. Average segment revenue per new customer was $46,200, up from $39,400 in FY '21, driven by growth in new software customer revenue at 85% to $59,200. Segment EBITDA returned to growth, though margins were lower year-on-year, reflecting continued investment in both R&D and sales and marketing and also customer onboarding to meet increased and forecasted demand. Now moving to our Education and Work Pathways vertical on Slide 26. ReadyTech operates in the massive global Edtech market, which is forecast to roughly double to $404 billion by 2025. Key drivers of the market and needs to technology include the shift to lifelong learning, the inwards micro-learning and micro-credentials online learning in remote and hybrid environments and student expectations for a modernized and digital experience. Building on our interoperable cloud service product suite, we are expanding our open ecosystem with innovative Ed tech community for partners to drive new value to customers, increase the stickiness of our platform as well as to generate new revenue share opportunities. Investors would be no not aware of our existing partnership with aNewSpring for the learning management system, or LMS. Following that success, we have now added Octopus for business intelligence, Pendula for student communications, and Learning Vault for digital badging. Touching briefly on Slide 27, in Edtech ReadyTech is known for student management system, which covers the full student life cycle from student acquisition through to graduation, placement and alumni. We continue to win customers due to our modern cloud architecture, high configurability for rapid deployment, local expertise, superior student experience and increasingly, our open Ecosystem model as I've just mentioned, which we are now expanding and is resonating very well in the market. To that end, the LMS upgrade has performed strongly. And on adoption of LMS, we continue to see increases in annual customer revenue of more than 2x. Turning to Slide 28 with a growing list of reference clients. We are experiencing strong new business at the enterprise end of the market. key wins during the year included enterprise training company, the Engineering Institute of Technology; Australia's largest employment services provider, MAX solutions; and the New South Wales State Training Authority Training Services, New South Wales. Education and Work Pathways segment results are shown on Slide 29. Revenue growth of 17.3% to $31 million on a like-for-like basis, driven by a substantial new business and upsell and extension such as LMS. Total revenue growth was 24.5% with AVAXA contributing $1.7 million in revenue for the year, demonstrating the enterprise and high-value customer growth added revenue per new customer of $45,800 was up from $38,800 in FY '21. We have a strong pipeline of high value qualified leads in Education and Work Pathways, underpinning expectations for continued growth. Now moving to long-term outlook on Slide 30. We remain well positioned for long-term growth. And today, we increased our FY '26 organic revenue target to over $160 million to incorporate the expected contribution of IT Vision. We also have a positive outlook for the year ahead on Slide 31. Before the contribution of IT Vision for FY '23, ReadyTech expects organic revenue growth in the mid-teens, a $2 million incremental revenue contribution from FY '22 acquisitions and EBITDA margin in the range of 35% to 36%, excluding the impact of LTIP. The 11 months contribution of IT Vision in FY '23 is projected to be $12.6 million and EBITDA margin of 22% to 24%. I I'll close now with the key takeouts on Slide 32. We have a robust and growing pipeline. We are expanding our channel partner strategy to fortify and scale our customer acquisition capability, our product market fit strategy continues to focus on enterprise customers. We continue to invest in talent to underpin future growth. And we have maintained our successful and disciplined track record of M&A. Lastly, we have a positive outlook for the long term with an updated target for the next 4 years. Thank you for your time once again, and I'll now open the call for any questions. Thank you.

[Operator Instructions] Your first question comes from Chris Gawler with Goldman Sachs.

Just maybe firstly on the BKI rollout. Just interested to get an update on that and your traction in some larger pace. I mean, is any of your high conviction pipeline from some of those tapes that you're looking to target in coming years?

Yes. Thanks very much for question, Chris. Yes, very, very pleased with the ongoing rollout at BKI. The projects have been rolled out in stages, and we're certainly coming to the completion of that project, and we have a very strong advocate in tape. I'm sure you know that subscription revenue for that project some time ago. And of course, with the addition of the Baxter during the year, as we said, we now have 3 of the largest metropolitan tapes in Victoria. So I think our position in that market has been significantly fortified. And I think -- it's fair to say that I think we are confident that takes are getting procurement ready and some of the legacy platforms out there really means that they are being pushed to market.

Yes. Great. And maybe just, again, just on the high conviction pipeline of greater than $25 million. I mean, do you mind just maybe quantifying that split across your segments? And how should we think about that converting over the next 12 to 24 months or so?

Yes. Thanks, Chris. So First of all, worth noting on the $25 million pipeline, it only includes new clients, not only the upgrade opportunities. and also excluded from that pipeline is any of the IT Vision pipeline. So the split rough split on the pipeline there is roughly 45% in Education and Work Pathways, 35% in Government and Justice and the remaining 20% is in Workforce Solutions. What we have in there is what we consider the high conviction opportunities. And what we also have in there is the growth pipeline opportunity and only taking the first year of annual subscription as well as implementation fees, not the entire contract. So -- but I think that we've seen on -- particularly on some significant enterprise opportunities, conviction strengthen over the half. And -- yes, we're very well placed to continue to convert. Look, I think in the last year and the year before, we've been converting around 60% to 65% of our high conviction pipeline. And we expect a similar conversion rate into the year-end.

Yes. Great. And maybe just one more question for me, just on the margin outlook. FY '23 guidance of 35% to 36%, excluding LTIP, that looks like at the midpoint the 100 basis points lower than what you achieved in FY '22. I guess 2 parts to the question. Firstly, I mean, what's sort of driving, I guess, that sequential margin decline year-on-year in the core business? And then secondly, how should we think about the margin outlook heading out to FY '26 as you look to hit that $160 million target?

Yes, Thanks. Chris, look, the first point on the margin of 100 bps. There's 2 parts to this. The full year impact of those lower margin acquisitions we did in FY '22. That has about 0.4 impact in FY '26 -- so it is FY '23, and we expect those margins to creep up in the longer term. And then the cost of doing business is around 0.5% Mark, and that includes the salary increases. There's also, I think, a [Supenuation] increase, statutory elements like that. So we are very -- Marc and I are very pleased that we maintain the cost of group business within other limits having nearly 500 starting of the organization. The second part of your question about the longer-term outlook, but we are quite confident that in the $160 million revenue target market will step up to that like 30% EBITDA margin, excluding LTIP. We are fundamentally investing at the moment on enterprise strategy. Marc has mentioned about the 17 roles in R&D, 17 roles being onboarding, increasing go-to-market. This is the time to enlighten enterprise strategy across all of the segments. It is not only the tech segment that you mentioned earlier, it's across all -- we've got the run rate business on the SME plus -- but opportunities on all those 3 segments and investing appropriately on the segment. But we see the margins tipping up in the longer term.

Our next question comes from Mitch Sonogan, Macquarie.

Congratulations on a good result. Just following on from the FY '23 guidance for organic growth again in mid-teens, should we expect any differences across the segments? Can you maybe just touch on how the momentum -- what you're seeing out there across the segments, just listening to the high conviction pipeline is 45% in the education and the 35% in Government and Justice. Is it pretty fair to expect those ones should be outperforming the Workforce Solutions segment over the next 12 months?

Yes. Thanks for the great question, Mitch. I think first of all, I would say that look, we have all these 3 segments set to grow around that same rate, which is mid-teens. I think your observation is correct with some of the very large enterprise opportunities, particularly in Education and Work Pathways, of course, those types of opportunities that we've seen with Ministry of Justice, you probably do have that opportunity in those 2 segments to outperform. However, the momentum that we're seeing in Workforce Solutions, the accelerated growth rate there. The -- I think the product market fit that we found and is very, very pleased with the strategy to target certain verticals. We're also seeing an accelerated growth in Workforce Solutions, and I feel it has a very, very positive future and good year ahead as well.

And Mitch, if I may add on the Workforce Solutions, but -- gone are the [Conrad ], the first time on a like-for-like basis of Conrad meeting organically. But more importantly, the software part has grown 20% we have been talking about the growth in software. And it's worth remembering that a lot of the top line opportunity in Workforce within the 6 months, they come and are executed with these 6 months. These are not long distention periods that you may have intact on other client council. So as Mark said, we're very happy with Workforce Solutions. And the growth part and I work very, very hard as the team.

Yes. Very clear. Maybe just a couple jumping on to the enterprise end. Maybe starting on the government, all those things. Can you maybe just talk to the engagement that you're getting from customers across IT Vision, what discussions you've been having? And do you expect most of them to transition to the Open Office ERP? Can you maybe just remind us what the average ARPUs or the differential between those 2, if you do get those customers converting across?

Yes. Great. I'll maybe pass to Nimesh very shortly on some of the metrics and those ARPU numbers Mitch. But I think, firstly, what we're finding in the IT Vision customer base is a very, very, I think, satisfied customer base, very loyal customer base, obviously, very sticky as well due to the nature of the technology. I think IT Vision has done a very, very good job of engaging this customer set around -- particularly around WA, and as a real true community of customers. And that, of course, has very significant network and referral effects. So we think we're coming from a very good site. Yes, the opportunity is to shift these customers towards the cloud-based offering and, of course, towards subscription. And part of that is through a product optimization strategy. We're leveraging some of the very strong Open Office technology. So maybe Nimesh, you want to talk about some of the numbers there?

Yes. So Mitch, the average ARPU at the moment, There's 190 clients reported, it's about [ $1.5 million ]. So the average ARPU -- concern on the $65,000 on the on-prem. And I think migrate to your point, the upside is fantastic. We've done some work on this. Obviously, we have the in-house knowledge with Open Office being our top product. And we think it's taking 3x upside every time we move one of those 190 clients to our cloud platform. In terms of how many we expect, we'll be pragmatic. We've got a lot of knowledge in this transition into cloud. At this stage, we think in the near term, we target about 30% to 40%. Obviously, we will probably like to do more, but 30% to 40% during the next 3 years. And eventually, we expect the market outrun.

Yes. Great. And just a final one, just jumping over to education, but more so from bigger universities as opposed to TAFE. Can you maybe just talk to what you're seeing in that pipeline there? Are there any tenders coming up in FY '23? And can you touch on if you did bid on any during FY '22? If there's anything else you need to do there within the business to continue to win those contracts?

Yes. We -- I think over the last 12 months, through excessive BKI, the addition of the AVAXA clients as well as the opportunity that we see, it takes that we already mentioned and the migration to cloud and I think an elevated product stack. We're very, very focused on tapes right now. I think that's really good tailwinds to take as well in terms of funding with the labor government. And so right now, highly focused on tapes. And I think really what we're seeing is we have a very much a tape-ready product, the product market is just so strong. So highly focused there, Mitch, as opposed to the university side.

Our next question comes from the line of Cameron Halkett with Wilson's Advisers.

Just a couple of questions here on hiring. So a number of roles added in the period and there's number of listings on the website at the moment as well, primarily for Workforce Solutions and simple implementation of focus. So just wondering how you're basically staffing to manage the existing deal flow and any implications as well around future hires in this space as a reference to future pipeline conversion?