ReadyTech Holdings Limited (RDY) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the ReadyTech Holdings Limited First Half of Fiscal Year 2023 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.

Thank you, and good morning, everyone. Thank you for taking your 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 H1 FY '23 results, which saw ReadyTech continued to deliver sustainable revenue growth and strong margins. In this H1 FY '23 financial results, we are very pleased to update on significant progress on our focused enterprise strategy that is driving momentum and increasing the number of larger and high-value customers across our education and Work Pathways, Workforce Solutions and Government Adjusted segments. Our current results are also an outcome of the dedication and passion of our team at ReadyTech. So before we begin the formal presentation, I'd like to thank all the ReadyTechers for their contribution throughout the half year. So with that, let me now begin with the key operational and financial highlights on Slide 3. During H1 FY '23, we delivered 13.4% like-for-like growth to $47.9 million in revenue, with recurring revenue at 84%, delivering $40.3 million. Underlying EBITDA was $15.6 million with an EBITDA margin of 35% or 32.6%, including IT Vision. Net customer revenue retention was 103%, reflecting low churn, customer expansion and successful cross-sell and upsell. The strong momentum is expected to continue in H2 FY '23, with revenue flowing from $9 million in a number of recently signed landmark enterprise contracts and a strong and growing high conviction pipeline of over $27 million as at the 31st of December. Overall pipeline conversion during the half year was particularly strong, with 24 new high-value customer wins producing [Technical Difficulty]

Pardon me, this is the operator. We have reconnected the speakers and will continue with the conference. Please proceed.

Apologies, everyone, for the dropout. I'm going to pick up from the end of Slide 3 and overall pipeline conversion during the half year that's particularly strong, with 24 new high-value customer wins producing 40% growth in average revenue per new customer. Slide 4 shows our outstanding and sustained performance over the past 4 years. Notably, we have consistently delivered growth in high-quality recurring subscription revenue with a CAGR of 30%. On Slide 5, and our focused and determined enterprise strategy continues to drive momentum and growth of high-value customers. I'll present some highlights of this strategy in the following slides. Turning to Slide 6 to highlight ReadyTech's strategic rationale for the enterprise and high-value customer strategy and why we see a highly attractive opportunity for our next-generation technology across all segments. The strategic rationale for ReadyTech is based on 4 key principles: firstly, the enterprise end of the market means customers with sizable technology budgets lead to strong expansion opportunities and high customer lifetime value. Secondly, cloud penetration is in its infancy across all our markets in enterprise, which create a very large opportunity for ReadyTech to replace legacy technology and accelerate digital transformation agendas. Third, we see strong moats given the significant upfront R&D investment required to reach enterprise-level product market fit. And lastly, we believe through scalable, configurable platforms, enterprise customers will support higher margins in the longer term for ReadyTech. In terms of our strategic execution in enterprise, moving to Slide 7. We have been performing well across all strategic pillars, which include our objectives to identify, select and expand in attractive markets, leading to a resilient and diverse set of customers. We focus on weighting our product R&D to enterprise product market fit and an open ecosystem approach. We're expanding our investments in enterprise sales and marketing, and lastly, we are scaling effectively by a network of strategic channel partners. Slide 8 demonstrates strong validation, that this strategic execution is delivering results across the enterprise landscape, with the recent set of landmark customer wins. During the half, we added 6 new enterprise contracts of $9 million combined deal value, including Auckland Council, UNSW Global, sunwater, City of Salisbury, Glenorchy City Council and New South Wales Government Phase 2 projects. What these contract wins reflect, is our ability to displace prominent and incumbent enterprise players, the differentiation provided by our open ecosystem approach and also how our strategic M&A has led to scale benefits and expanded product offerings that are attractive to new enterprise customers. And again, we expect these win themes and strong momentum to continue in the remainder of FY '23, as our high conviction pipeline of new clients is now over $27 million. With that, I'll now hand over to Nimesh, our CFO, for an update on the financials. Nimesh, thank you.

Thanks, Marc. So on Slide 10, it provides an overview of ReadyTech's P&L. It is worth noting that earnings are presented on an underlying basis, unless otherwise stated with adjustments on statutory to underlying shown at the bottom of the slide. In addition, references to like-for-like revenue items compared to contribution from FY '22 acquisitions of Open Windows and Phoenix against respective prior corresponding periods and excluding impact of IT Vision to show the organic performance of the business. Total revenue for first half of FY '23 was $47.9 million, growing at 34.2% or 13.4% on a like-for-like basis. Subscription license revenue of $40.3 million, representing 84% of total revenue. Revenue growth was underpinned by growth in user licenses and module upgrades as well as new customer wins looking to average revenue per new customer by 40% to $72,300 per annum. Through acquired companies and investment in growth, expenses were $32.3 million, which is an increase of 15.4% on a like-for-like basis and mainly due to planned investment resources to support product development and delivery for recent enterprise customer wins, which will start to be onboarded in the second half of this fiscal year and beyond. Underlying EBITDA of $15.6 million, representing an EBITDA margin of 32.6%, excluding the impact of IT Vision, EBITDA was $14.9 million margin -- EBITDA margin of 35%. Turning to Slide 11 and a summary of balance sheet and cash flow as of 31st December, 2022, available cash for use was $15 million, including $11 million in cash and equivalents and $4 million debt facility headroom given the company's $50 million facility was drawn to $46 million. 40% of the $50 million facility has been hedged with an interest rate swap. At 31st December 2022, net debt was $36.1 million, with a leverage ratio of 1.2x, well within internal target range and supported by growing cash flows. In terms of operating cash flow of $14.5 million in operating cash flow before interest tax and normalized costs was generated for the half year, representing a 94% conversion as a percent of EBITDA, supported by continued growth in customers prepaying annual subscription fees. I'll now hand over back to Marc to talk you through to update by segment and the outlook.

Thank you, Nimesh. Moving to Slide 13. Let's talk about Workforce Solutions. And in this segment, ReadyTech operates in a large addressable market of $2.4 billion. Our key focus remains on solving complex payroll and workforce management in the standard economy, and we target initial industry verticals with an all-in-one offering, and those verticals include logistics, hotels and accommodations, age and disability care, manufacturing, agriculture and retail, and this highly targeted industry vertical strategy enables efficient customer acquisition via targeted sales and marketing activity and is benefiting from a growing channel partner strategy. Turning to Slide 14. In Workforce Solutions, ReadyTech offers an all-in-one platform that is highly differentiated in the mid to enterprise market. To further build product market fit, -- our key focus is on elevating the employee experience and supporting greater mobility to assist our customers in engaging and retaining their people. It's also worth noting that upselling to all in one remains a significant opportunity in this segment with average revenue per customer 3x higher on all-in-one than on payroll only. On Slide 15, and connected to this people-centric strategy, we are pleased to present the product release of ReadyPeople and employee experience gateway designed for the needs of the standup economy, enabling them to work smarter in one place and with a high degree of mobility. ReadyPeople accelerate upgrades to cloud and will serve as a significant future growth driver. Moving to Slide 16 and 17, we provide here 2 examples of our industry vertical strategies in action, in the agriculture and hotel and accommodation sectors, which are both delivering strong growth. In addition to some of the compelling benefits of the all-in-one system, these clients have been choosing ReadyTech for specific industry templates that we deploy as well as our strong employee self-service and already employee recruitment and onboarding capability. In terms of Workforce Solutions segment performance on Slide 18, we delivered revenue growth of 18.3% to $13.6 million, with software revenue growing once again above 20% to $8.8 million. This is driven by 33 new customer wins in H1 FY '23, with the majority in the all-in-one platform as well as module and cloud upgrades from existing customers. We'll move now to Education and Work Pathways, and on to Slide 20, ReadyTech operates in the attractive EdTech market where we are responding to market trends and tailwinds with a unique open ecosystem that offers customers innovation and choice. Through this strategy, on Slide 21, ReadyTech is making strong progress in the education enterprise market and advancing across multiple vertical opportunities, driving growth across a large addressable market ready for change. We are well positioned with TAFE, higher education and state training authorities with our market-ready products underpinned by a growing reputation of successful implementations Touching briefly on Slide 22 and 23 in EdTech, ReadyTech is known for its student management system, which covers the full student lifecycle. We continue to win customers such as UNSW Global in the half, due to our modern cloud architecture, high configurability, local expertise, superior student experience and increasingly, our open ecosystem model, which, as I've just mentioned, is resonating well in the market. Our Education and Work Pathway segment results are shown on Slide 24, revenue growth of 13.1% to $6.8 million, was underpinned by strengthening recurring revenue base of $14.4 million and assisted by continued upsell and cross-sell of core products. This strong momentum is driven by new customer wins in Education and Work Pathways products, and strong customer retention, providing sustainable revenue growth into H2 FY '23 and beyond. We'll move now to our Government and Justice segment. And firstly, focusing on government on Slides 26 and 27, where digital transformation tailwinds and migration to the cloud continue to be key drivers of our business. In local government -- through the combination of IT Vision and Open Office, we now reach 270 of the 530 local councils in Australia, and we continue to view the market as highly addressable, given over 75% councils purchased a core solution 10-plus years ago. We are ready to digitize government with digital transformation for improved customer service and growing community expectations for digital interfaces. Moving on to Slide 28; IT Vision's integration is well advanced, and the strategy is being strongly validated since our acquisition. In this slide, we include a reminder of the strong strategic rationale for the IT Vision acquisition, which we have outlined previously. We're pleased to say we've achieved very good progress across the integration streams, and the combination is being strongly validated with multiple cloud upgrades, the number of upsells of our Open Windows contracts and procurement products as well as a major metro council ERP win all since the acquisition was completed. In terms of Justice on Slide 29, this continues to present a major global growth opportunity. The product suite has high portability to other Commonwealth justice geographies on the back of our recent global successes in Fiji and the U.K. Feedback on the U.K. project has been a major success, and we believe this places ReadyTech in a very good position for future expansion, including overseas opportunities. On to Slide 30; the strong momentum of government enterprise wins is validating, firstly, our innovative cloud products, but also our integrated offerings that have been achieved through our highly strategic M&A with recent case studies provided here for wins, including Glenorchy City Council, City of Salisbury and Auckland Council, as we establish ReadyTech as a highly trusted government enterprise player. On to Slide 31, and government adjusted segment delivered revenue growth on a like-for-like basis of 9.1% to $12 million, and in terms of those recent acquisitions, IT Vision is performing well with revenue of $5.5 million and EBITDA of $0.8 million since acquisition. Based on recent wins of new customers such as Salisbury Council and cloud upgrades, IT Vision is on track to meet its FY '23 revenue guidance of $12.8 million and an EBITDA margin of 22% to 24%. Open Windows is also performing according to expectations and well placed for a strong H2 FY '23 with that landmark customer win of Auckland Council. We'll move now to FY '23 outlook outlined on Slide 32. And today, we are pleased to reaffirm our guidance of organic revenue growth in the mid-teens before the contribution of IT Vision, $2 million of incremental revenue contribution from FY '22 acquisitions before the contribution of IT Vision and EBITDA margin in the range of 35% to 36%, excluding the impact of LTIP and IT Vision. IT Vision's 11 months revenue contribution in FY '23 is projected to be $12.6 million at an EBITDA margin of 22% to 24%. Also, importantly, second half FY '23 growth will be underpinned by the $9 million revenue of recent enterprise deals. Slide 33, and we remain well positioned for long-term growth. And today, we also reaffirm our FY '26 organic revenue target to over $160 million, driven by the ongoing momentum of enterprise customer wins and the high conviction pipeline. Closing with the key takeouts on Slide 34; we are seeing growing momentum with enterprise wins. We have a robust and growing pipeline. We enjoy a diversified and defensive revenue mix. Our M&A strategy is delivering to plan, and we have a positive growth outlook for the long term. Thank you for your time once again. I will open now for questions.

We will now take our first question, which comes from Chris Gawler from Goldman Sachs.

Firstly, maybe just on the $9 million of deals that you announced, I mean were they all recognized very late in the half, and so the second half incremental contribution will be around $4.5 million. Is that the right way to think about it?

So thanks, Chris. Good question. So about $9 million, just to start what we represents, that the first year subscription and services revenue, right? They came late in the half, as we've indicated, very, very minor as the amount has been recognized on [ first half ]. So you will expect about 30% to 35% recognized in the second half. and the rest beyond that. So these are enterprise deals with a good upfront subscription implementation revenue and thereafter, if there's annual subscription payments.

Yes. That makes sense. And maybe just switching to margins. I mean, just note some of the larger enterprise deals that you've signed, particularly in the education vertical. Just interested in the incremental margins of those deals, are you having to price pretty sharply to win those tenders or yes, anything around the incremental margins would be helpful?

Yes, good question. So we build configurable software Chris, so the incremental margin by theory is always going to be higher. [ Through ] that we've invested in the last 12 months and probably the next 6 to 9 months on our enterprise strategy. You'll see labor capitalization as a reflection of that. So going beyond any new deals in that particular segment and a new council or a new TAFE will have incremental margins higher than our current run rate margins.

Yes. And just on the capitalization investment point that you made, I mean that was about $10 million in the half, which has grown quite a bit over the last couple of years. Is that likely to decline from here will be about the same for the second half?

Yes. Look, good question. So the $10 million, one thing it's -- and you'll see in the accounts, $1.2 million of the [indiscernible], Chris, was dedicated on a third-party provider for our mobile app. And that mobile app, as ReadyPeople as Marc mentioned, is coming to the end. So we're looking at around sort of half around $8.8 million. For the full year, we are very comfortable around that 15%, 16% of revenue. Again, going to that product strategy, product market fit enterprise and over the longer term, as a percentage of revenue, expect them to moderate.

Yes. Awesome. And then just lastly, just on the U.K. Justice deal, I mean, is that fully ramped up and kind of a full run rate now?

Yes, that's right, Chris. We've had a number of stages of implementation go live. We've had some additional scope and change requests. So yes, extremely happy client, very successful implementation, and that's certainly opening further opportunities as a trusted provider within the Ministry of Justice itself, but also wider opportunities in commonwealth countries, as [indiscernible].

And our next question will come from Jules Cooper with Shaw.

I just wanted to focus in on IT Vision. So post acquisition, you've disclosed that 8 customers have committed to payout upgrades. But it looks like the ACV increase is pretty substantial versus the average across the business. Is that a kind of reflection of maybe the size of customer that is responding early, or is it really a reflection of the opportunity you see migrating customers from their legacy solution through to Open Office over the duration? I'm just wondering whether it's more a size or just a value opportunity that you see there?

Yes. Actually, I'd say it's partly both actually, Jules. So look, really the -- one of the core growth opportunities and part of the rationale here, was the opportunity to accelerate this cloud transition to the IT Vision customers. The average contract value is currently around $60,000 per annum across all of those customers, and they move across to the fuller cloud suite, and that includes a proportion of Open Office technology as well as Open Windows technology from a contracts and procurement perspective. What we're now seeing through some of these early upgrades is ACV growing to around 4x larger as they take on that full suite. So obviously, across around 176 customers, that's a very significant long-term opportunity for us.

Yes, absolutely. And maybe if we could, and we've got a little bit of time, there's some really good success in the local government area there. Is it worth just sort of providing some insights about how the acquisitions have contributed as well as the investment you've been making in your enterprise capability?

Yes, absolutely. So look, I think part of the rationale again for bringing Open Office and IT Vision together was really to consolidate a market-leading position and have those scale benefits. And obviously we've seen a large and very reliable and trusted local government enterprise player. I think that you're seeing those results start to come through. And I'd probably point to the City of Salisbury opportunity, it's a very significant metropolitan council in South Australia. It's a very good sized council. And the City of Salisbury has really been very attracted to this combination of the IT Vision and Open Office suite and our ability to partner with them, really using, again, the sort of open ecosystem approach that I think we'll talk a lot about Jules, which really gives customers choice and the ability to face the implementation over a period, as they roll out different sets of product suite and modules. So look, think we're -- I think, within only, I think, 8 or 9 months since the acquisition was completed, we're seeing really strong validation. All the points of strategic rationale are starting to bear fruit. So over the long term, it's really the kind of a major opportunity for the company.

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

Thank you. Thanks, everyone, for joining today. Absolute pleasure to present these results. I think the momentum across our products and enterprise strategies. Look forward to meeting many of you on the upcoming investor roadshow. And I hope you enjoy the rest of the day. Thanks for coming today.

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