ReadyTech Holdings Limited (RDY) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the ReadyTech Holdings Limited FY '23 Conference Call. [Operator Instructions] I would now like to hand the conference over to Marc Washbourne, CEO.

Good morning, everyone, and welcome. Thank you for taking the time to join our FY '23 results investor call. I'm Marc Washbourne, CEO and Founder of ReadyTech, and I'm joined today by Nimesh Shah, ReadyTech's CFO. I'm pleased to present to you the results of the financial year ended 30 June 2023, which saw us deliver another strong year of performance. In today's FY '23 results call, we are delighted to update you on the progress made in the past year, where our enterprise strategy continues to flourish across all segments of ReadyTech, and we have significant momentum moving into FY '24 with a positive outlook for future growth. As always, our performance is the sum of collective efforts, and these results couldn't be achieved without the commitment of an inspirational team of people at ReadyTech. And so firstly, I would like to express my gratitude to every ReadyTecher for their contribution during FY '23. So let's make a start on Slide 3 with key operational and financial highlights. For FY '23, we delivered an increase of 13.1% on a like-for-like basis in revenue to $103.3 million, whilst recurring revenue increased 13.2% on a like-for-like basis to reach $84.3 million, a total of 48 new high-value customer acquisitions were achieved during the financial year for an aggregate value of $16.4 million. And this includes 11 major enterprise contract wins worth $12.4 million, reflecting our determined strategy of winning large and high-value customers. The average revenue increase per new customer was just over $95,000, an increase of 74% year-on-year, underlining the progress of the strategy. EBITDA to operating cash flow conversion was particularly strong at 95.4% compared to 85.3% in FY '22. Slide 4 demonstrates our growth journey over the last 4 years as a public company. This strong performance reflects the success of our enterprise SaaS strategy as we continue to grow high-quality recurring subscription revenue with a CAGR of 34%. Slide 5 presents the strategic pillars of our focused enterprise strategy that is driving growth momentum and resulting in new high-value customers. Our strategic rationale for enterprise is based on 4 key pillars: firstly, the enterprise end of our market means sizable technology budgets, leading to strong expansion opportunities and high customer lifetime value. Secondly, cloud adoption remains in its infancy across our markets in Enterprise, which creates a large opportunity for ReadyTech to replace legacy and accelerate digital transformation programs. Third, we're building strong moats given the significant upfront R&D investment required to reach enterprise-grade product market fit. And lastly, we believe that through scalable and configurable platforms, enterprise customers will support our ambition and plans for higher margins in the longer term for ReadyTech. If Slide 5 is the why, Slide 6 reflects the half of our enterprise strategy. And in FY '23, we have made strong progress across all strategic objectives, including in our plans to focus on enterprise product market fit with R&D focused on cloud and an open and connected ecosystem, expand our enterprise go-to-market focus through investment in sales and marketing as well as ReadyTech's enterprise brand, so you don't get fired for hiring ReadyTech. And lastly, our plan to scale and drive growth by enterprise strategic partnerships. And Slide 7 clearly validates our investment in the enterprise strategy with a record number of landmark customer wins in the financial year. In the last 12 months, we added 11 new enterprise contracts with a combined value of $12.4 million. Some key examples being Burwood and George Town Council in government ERP, Nando in Workforce Solutions and UNSW College and TAFE SA in Education & Work Pathways. These results confirm our ability to displace incumbent enterprise players and provide endorsement of our open ecosystem strategy, our customer-centric ethos and the benefits of our strategic M&A, which has strengthened our product sets. With this growing track record in enterprise, we start FY '24 with solid momentum and a high conviction pipeline, which continues to increase and now stands at over $28 million. Slide 8 outlines the major opportunity of our enterprise strategy, outlining the large markets, which are not just addressable but serviceable by ReadyTech. And it's this exciting opportunity that will continue to drive long-term growth. In aggregate, through our investments in enterprise, our growing track record, as outlined, and the volume of legacy technology right to be transitioned to cloud, we estimate we now have access to a total serviceable market of over $970 million. On to Slide 9, the world of emerging technology is moving fast in areas such as open AI and large language models, and ReadyTech is ready to capitalize through our advantages of access to large and high-quality data sets, our culture of innovation and existing investments in AI and machine learning. For example, in FY '23, ReadyTech released and implemented Ready AI, a prediction of student and apprentice likelihood of drop-out. This innovative capability supports customers to identify risk and develop actionable and automated support plans to improve student retention. And this is just one of many use cases currently being explored. Indeed, ReadyTech is currently focused on how the next generation of AI has the potential to deliver new value to customers, including improved product automation and personalization, such as the release of co-pilots in our products and the opportunity to improve the velocity of both software product development as well as customer implementation products. As outlined on Slide 10, and as FY '23 has clearly demonstrated ReadyTech's open ecosystem is a key differentiator and is resonating well in our markets. ReadyTech offers distinct advantages over the platform monoliths, and it's through this open and connected approach, we are offering greater customer choice as well as deep flexibility, interoperability, resulting in a superior overall customer experience. I'll now hand over to Nimesh, our CFO, for a further update on the financials.

Thanks, Marc, and good morning, everyone. Slide 12 provides an overview of ReadyTech's profit and loss. It is worthwhile to note that unless otherwise stated, earnings are presented on an underlying basis, the adjustments from statutory to underlying shown at the bottom of the slide. Also, like-for-like compares to organic results without the impact of IT Vision. Total revenue reached $103.3 million, which is up 31.9% or 13.1% on a like-for-like basis. Revenue growth was driven by growth in subscriptions, new customer wins and the upsell of partners' products and modules to existing customers. Subscription revenue was $84.3 million, representing 82% of total revenue and a 12.9% year-on-year growth. We continue to invest for growth and as a result, expenses increased to $68.5 million, an increase of 14.9% on a like-for-like basis. Underlying EBITDA was $34.8 million, representing -- delivering a margin of 33.7%. Excluding the impact of IT Vision, EBITDA margin is 35.6%. Importantly, underlying cash EBITDA of 16.3% for the full year incorporates incremental investment enterprise growth as well as the impact of recently acquired lower-margin business. Moving on to Slide 13 is a summary of the balance sheet and cash flow. As of 30 of June 2023, available cash to use was $26.6 million, including $23.6 million in cash and equivalents and a $3 million debt facility headroom given $50 million facility drawn to $47 million. Importantly, 40% of the total facility has been hedged with an interest rate swap. Our strong cash flows and conservative approach resulted in net debt of $27.7 million and a net leverage ratio of 0.8x as of 30 June '23, which is well within our internal target range. Continued SaaS revenue growth in customers prepaying annual subscription fees delivered operating cash of $33.2 million, which is a strong 95.4% conversion as a percentage of EBITDA. I will now hand over back to Marc to walk you through the segment and outlook.

Thank you, Nimesh. And across Slides 14 to 17, we outline our progress in the Education & Work Pathways segment. Here, ReadyTech is capitalizing on major opportunities in education, where we clearly see a market ready for accelerated digital transformation. Across the enterprise landscape, we see high levels of end of life and legacy software, a necessity for platform change due to major compliance reforms and expectations for a modern and digital student experience. On top of this, we expect to enjoy strong macros in the urgent demand for upskilling and in the bounce back of international student activity. And against this backdrop, that ReadyTech in this segment delivered revenue growth of 16.4% to $36.1 million. Across Slides 18 to 22, we move to our Workforce Solutions segment, which is delivering strong growth driven by increasing subscription revenue. Revenue from software has increased 20.4% year-on-year to $19.3 million. Revenue growth was driven by 78 new customer wins as well as strong cloud upgrades and the upsell of modules. This performance of growth is being delivered by ReadyTech's all-in-one workforce management offering, which is gaining momentum in sectors ready for change. FY '23 has seen particularly strong traction in the retail and FMCG, agriculture and hotels and accommodation sectors. Some notable wins in the year are outlined on Slide 22, such as Burger King, Nando's, [ Bendon ] and Sofitel, among many others. Again, this high-value customer strategy is clearly delivering with growth in average revenue per new customer of 46%. Lastly, moving to our government adjusted segment across Slides 23 to 26. Here, we are pursuing a major opportunity across 4 key growth drivers, which are: #1, acquiring new local government customers; #2, upgrading existing local government customers to subscription and cloud; and #3, growth in our contracts and procurements products, winning new blue chip clients and upselling to government customers; and #4, the global growth opportunity in Justice Case Management software. In the segment in FY '23, revenue grew 61.9% to $38.7 million, but revenue on a like-for-like basis increased 5.7% year-on-year. Government revenue was impacted here by downgrades in primarily project-based and nonrecurring revenue by a number of state government customers with a value of approximately $2 million. And this reflects for us, what is a purposeful shift of focus towards the more repeatable and scalable local government side of the market. The newer addition to ReadyTech IT Vision, the revenue was $12.6 million, with 21.7% EBITDA margin in FY '23 as expected and in line with plan. For the second half of the financial year, IT Vision EBITDA margin improved to 27%. In FY '24, we expect organic revenue for this segment to return to mid-teens growth driven by recent customer wins, including City of Salisbury, Auckland Council, and Glenorchy, George Town and Burwood Councils. In addition, we have a number of committed cloud upgrades for IT Vision and a healthy sales pipeline. On to Slide 27 and on to the all-important outlook, and ReadyTech is well positioned to continue to deliver profitable growth in FY '24 and beyond. Our FY '24 outlook is to deliver organic revenue growth in the mid-teens, EBITDA margin in the range of 34% to 35%, excluding the impact of LTIP, labor capitalization to be reduced to 14% to 15% of revenue from 15.8% in FY '23. Today, we are also reaffirming our medium-term target for FY '26, which is an organic revenue target of over $160 million, EBITDA margins increasing to high 30% and labor capitalization to normalize in the range of 12% to 13% of revenue. To wrap up with key takeouts, I'll move to Slide 28, and momentum is clearly building in the enterprise space. We are delivering profitable growth and are executing on a strong pipeline across large and serviceable enterprise markets. Our revenues are diversified and defensive in nature. We are well positioned to capitalize on the AI revolution. And today, we reaffirm our positive long-term targets to deliver organic revenue of over $160 million by FY '26 with EBITDA margins of high 30%. Many thanks, and I'm really happy now to open to any questions. Thank you.

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

Congratulations on the results, guys. Just a quick one. Just on the group EBITDA margin, now up 50 basis points year-on-year, excluding the LTIP and low margin contribution from ITV. You put out expectations for that to improve to 37% in FY '24 and reaching high 30s in the FY '26 outlook. So can you maybe just talk to the drivers there? Should we expect that to be a bit of unsteady improvement each year-on-year? And obviously, you've had a lot of investment over the last few years in chasing that enterprise strategy such as [indiscernible] can understand feels like you're at the point now where you can expect seeing a little bit more operating leverage coming back into the business?

Yes. No, that's Mitch, it's a good question. So as we have said in the past, in the period of '22 and again in '23, we invested on our enterprise product strategy which is now paying dividends. And what we build is complete software, very strong operating leverage and then it's coming to the margins. And we expect our guidance take the margin to increase incremental every year. But equally important, and it's worth noting that not only is our EBITDA margins expected to grow year-on-year in terms of cash margins. And for the first time, there's a publicly stating our cash EBITDA margins out there, which are also increasing on an incremental basis year-on-year. So [ what in ] short of another enterprise strategy is working.

Yes. I just might extend a little there, Mitch. I think you're absolutely right. There has been a period of deeper investment in enterprise. I think that period. And so it's coming towards the end, particularly seen in R&D and that higher labor cost, you're absolutely right. We think over time, we see the operating leverage coming through across many areas of the business, including R&D, also sales and marketing. And lastly, worth pointing out that margins are improving in some of the lower-margin acquisitions that we've made as planned. And as Nimesh said, for that reason, out towards FY '26, I can obviously do the math, but we see that incremental cash margin improvement coming through.

Yes. Great. And just a quick one. Some Workforce Solutions. Obviously, a really solid result there. Do you just tend to get a little bit more detail on the average revenue per customer that was up 46%. Just talk to the drivers a little bit more, maybe that to uplift you see when a customer takes you on one platform, but also maybe the traction that you're seeing in winning those larger customers.

Yes. Thanks, Mitch. I think as you can see there a very significant number of new logos. We are very focused, as you know, on a number of verticals where we're just a really good fit from a product perspective, and we very concentrated sales and marketing efforts into what we call the standup economy. We still see very significant legacy of disconnected systems of both payroll and workforce management. And it's the all-in-one system, which is very efficient, totally connected user experience that's driving this growth. And also, I think that what's coming through very clearly is the size of the customers that we're able to go after are significantly higher than they were just 2 or 3 years ago. So I think we are now able to support customers with thousands of employees. Previously, our sweet spot was probably more in the sort of 200 to 1,000 employee range. So those are really the key drivers. You see that very significant increase in average revenue per new customer of 46%. And yes, we're really happy with the traction and the momentum that we see in this business. I think we've got multiple years of really solid growth ahead.

Next question comes from Wei Sim from Jefferies.

Congratulations on a great result. Two for me. The first one is just in terms of the employee benefits expense. Excuse my questions as I'm still new to the company. It seems to be increasing quite quickly, and I appreciate there's probably some of the acquisitions going into that. But I'd be keen to understand how we should think about this expense going forward?

Yes. Good question, Wei. So you have to look on a like-for-like basis. So obviously, we are this time last time, last period, we didn't have the IT Vision acquisition. So on a like-for-like basis, you see us [ value ] expense, it's around that single-digit growth, which includes investment into head count and as well as salary increases. It's worth also mentioning that, that period of hype and [ go ] for talent has now moderated. We're seeing supply side really helping us and our wage cost is well within target.

Okay. Perfect. And then my second question was just in relation to Government & Justice. If we do break out IT Vision, it seems like the underlying growth or the organic growth probably wasn't as strong. And I know you called out some of the nonrecurring revenues and those rolling off. Just wondering how much more of the revenues within that area could be nonrecurring and thus at risk?

Yes. I think the answer is very little. As you pointed out, the real key reason here for the lower growth with some of these downgrades amounted to around $2 million in state government part of our business, which is predominantly state government clients and some project-based work and nonrecurring work. We have made in the classic ReadyTech way, I think, a very purposeful shift to the more repeatable and scalable opportunity, which is in local government. We made a very conscious decision to do that. But I think to your question, this is very much a one-off in terms of downgrades. And from here, we certainly expect this segment to revert back to mid-teens. It's worth pointing out that in the -- as you can see in the enterprise wins, the weight of those are in Government & Justice. So obviously, we've had a good number of government ERP wins, and we've seen really strong upgrade activity in ITV. So yes, we feel very confident of return to mid-teens in the FY '24 year.

Yes. And just adding to that, Wei, that is what Marc said, 51% of that $12.4 million enterprise using Government & Justice. And you mentioned also in the ITV that when we bought the IT Vision business, a great business of 176 clients. We talk about its upgrade to cloud. And 20% has already within 12 months well ahead of the expectations, already taking one of the 6 modules as part of migration, and you see that the penetration increasing. And the incremental value taking the part is up to 4x the current legacy revenue. So Marc and I and we are very confident in returning that mid-teens growth organically.

Okay. Great. Do you mind if I sneak just one more in. Just in terms of AI, I have to ask, it's the hot topic at this point in time. Ready AI sounds very exciting. I'd be keen to understand just in terms of the monetization and how we think about the return on this relative to, I guess, non-AI kind of software that we're offering?

Yes. I think, first of all, that the latest iterations of AI technology, generative AI, I think they're very well suited to our products. We think that there are vast numbers of use cases where we can augment our products. We expect to release our first co-pilot or assistant in the product and sheer based on large language models. So in terms of the monetization opportunity, I think depending on the segment and the market, obviously, we can look at the underlying price of the subscription software and pricing and packaging at the base use of the software as well as additional modules and optional modules that may be AI-based, based on large language model workflow. So certainly watch this space. And I think over the course of the next 6 to 12 months, you should expect to see a number of very fine releases, particularly around the area of co-pilots.

Your next question comes from Cameron Halkett from Wilsons Advisory.

Just one quickly following up on Mitch's comments around Workforce Solutions. Just looking at the second half EBITDA margin now back above 40% quite comfortably despite a bit more implementation revenue seen in the half. How do we think about margins within that segment looking ahead, given there had been a focus of reinvestment in the last couple of years?

Yes. Thanks, Cam. Look, I think that 40% is a good margin that we see going ahead and if any incremental increase. But on a percentage here, worth noting, Cam, that we put in implementation people to accelerate the growth, organic growth of 20% is fantastic and Glenn and Marc are very happy with that. So we believe we are fully costed and any incremental margin or any new clients will have high incremental margins as we drive this industry vertical strategy across the Workforce Solutions segment.

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

Yes. Thank you so much. Thanks, everyone, for joining the ReadyTech call today. Nimesh and I have really enjoyed presenting these results and reflecting on the strong progress we've made in this financial year. No doubt we'll meet many of you during the upcoming Investor Roadshow. Enjoy the rest of the day. Thanks again.

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