ReadyTech Holdings Limited (RDY) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the ReadyTech Holdings Limited First Half Fiscal Year '24 Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Marc Washbourne, Co-Founder and CEO. Please go ahead.

Thank you, and good morning, everyone. I appreciate you taking the time to join our H1 FY '24 results briefing. I'm Marc Washbourne, Co-founder and CEO of ReadyTech. And I'm joined here today by Nimesh Shah, ReadyTech's CFO. In today's results call, we are pleased to provide you with highlights from across our results, as well as an update on the progress made against our growth plan and strategy. Moving to Slide 2. As an introduction, ReadyTech is a vertical SaaS growth company, providing next-generation, mission-critical software crafted to closely meet customer needs across human-led sectors. We span across 3 segments, all of which are undergoing digital transformation: Education & Work Pathways, Workforce Solutions and Government & Justice. On Slide 3, our key operational and financial highlights. In the first half of FY '24, we delivered revenue of $54.7 million, which is an increase of 14.2% on the prior corresponding period. We're pleased to report that recurring revenue grew 17.1%. The subscription revenue represents for the half, 86.3% of total revenue. Over the period, we signed another 16 enterprise contracts, representing $7 million in annualized revenue. Average revenue per new customer was over $123,000, increasing a further 29% from FY '23. This increase is a result of our deliberate strategy to target larger, high-value enterprise customers. These high-value customer wins, coupled with strong operating leverage, resulted in underlying EBITDA of $17.4 million and a margin of 31.8%. In the period, we also saw strong operating cash flow conversion of 113%. Slide 4 gives you a flavor of the high quality of the enterprise contracts we acquired in the first half of FY '24. These included our largest Workforce Solutions customers to date in Seeka in our target standard economy, local government ERP wins with Yorke Peninsula Council and Shire of Dardanup, as well as major cloud upgrades for Melbourne Polytechnic TAFE, and Chisholm TAFE in Education segment. Through these results, we have continued to prove our ability to displace incumbent enterprise players with our next-generation cloud technology and attract new clients with our open ecosystem platform approach. Our track record and breakthrough wins across the verticals have opened new and large opportunities, and our reputation is building with our high conviction pipeline currently exceeding $30 million. Despite this progress, we have seen the timing of a number of high conviction opportunity shift into FY '25, though I remain confident in the overall health of the pipeline, and in our ability to sustain our pipeline conversion rates. As you can see on Slide 5, our growth trajectory is clear, and we have grown our recurring subscription revenue at a 3-year CAGR of 35%, reflective of the success of our enterprise strategy and our ability to win high-value subscription contracts. Moving to Slide 6, I will now hand over to our CFO, Nimesh Shah, who will take you through our financial performance in more detail. Thanks, Nimesh.

Thanks, Marc and good day everyone -- good morning, everyone. Shifting to Slide 7, the first half FY '24 was another solid half for ReadyTech in terms of revenue growth and margin deliveries. Total revenue increased 14.2% to $54.7 million, driven by new higher-value customer wins and the successful upsell of products and modules to our existing customer base. Net revenue retention of 103% reflects a high level of customer stickiness and above success in upsell. Subscription revenue represents 86.3% of total revenue, up from 81.6% a year earlier. This is a highly predictable revenue stream for us, given the recurring nature of sales and continued high customer retention rate. For the 6 months period, average revenue per new customer increased 29% to over $123,000 per annum. As Marc mentioned earlier, this is a result of successful execution of our enterprise strategy and our approach to targeting higher-value contracts. Underlying EBITDA, which excludes the impact of LTIP and nonrecurring costs was $17.4 million, delivering a margin of 31.8%. Underlying cash EBITDA margin grew also and improved to 14.3% in the half. Moving to balance sheet and cash flow on Slide 8. ReadyTech remains conservatively geared with strong cash flow generation supporting our growth ambitions. At 31 December 2023, the company had $21.9 million cash available for use, including $14.9 million cash and equivalents and $7 million headroom in the $50 million debt facility. Net debt was $29.4 million and net leverage ratio at 0.7x as of 31 December, both metrics well within our internal targets. Continued subscription revenue growth and prepayments annual subscription fees delivering an operating cash of $18.7 million, representing very strong conversion of 113% of EBITDA. Turning to Slide 9, which gives you an overview of the strong performance across all of our 3 segments, each delivering double-digit revenue growth and continued strong margins. Education & Work Pathways delivered a 12.4% revenue growth driven by new customer wins, cloud upgrade of TAFE customers in the last quarter, and upsell of modules, such as our Learning Management System. EBITDA margin for the segment was in line with prior year at 43.2%. Workforce Solutions was also driven by new contract wins and successful upgrades with revenue growing at 11.1% on last year, which includes the key parts of software growing at 15.4%. And finally, Government & Justice increased 18.3% on a PCP basis, driven by customer wins and continued cloud upgrade of IT Vision customers. Segment EBITDA grew 16.7% to $5.6 million. I will now hand back to Marc.

Thanks, Nimesh. In the next few slides, I'll take you through some further detail behind our strategy, ReadyTech's growth drivers, and finally, to our outlook. Turning to Slide 11. As expressed here, we have carefully selected large addressable vertical SaaS markets that are both aligned to our core principles and enjoy long-term industry tailwinds. The growth opportunities are centered around 3 key areas: transition to cloud and the shift away from legacy competitive systems, responding to complex regulatory and compliance requirements as well as the need for significant uplift to the student, employee and citizen experience enabled by digital transformation. Slide 12 outlines the major opportunity of our enterprise strategy that's available to us. Importantly, the opportunity represents not just the addressable market, but what we believe to be our serviceable market, totaling over $970 million in aggregate and underpinning our continued long-term growth across multiple verticals. Slide 13 presents the key pillars of our strategy on which we are executing on a clear and disciplined way. Our #1 strategy is to acquire large enterprise customers across all segments. The journey to enterprise is opening large new markets and opportunities for major contracts. Secondly, the power of the installed base strategy that's bringing value across our customer ecosystems and supporting transition to cloud and subscription, well demonstrated in the half by the 2 TAFE upgrades. Next, a growth driver is continued investment in purposeful R&D and innovation. We target perfect product fit and maintaining strong customer retention. Lastly, strategic and disciplined M&A, our proven playbook to acquire customers, complementary capabilities or to enter new markets, delivers on growth as well as synergies. Slide 14 outlines the why of our enterprise strategy. ReadyTech continues to be well positioned to attract large enterprises with sizable technology budgets also leading to long-term expansion opportunities and high customer lifetime value, with digital transformation and cloud adoption still in its early stages across our markets. We have a very large opportunity for displacement of legacy competitive systems as well as strong competitive advantages with our advanced enterprise and open ecosystem product set. In addition to this, ReadyTech is well positioned to deliver improved margins through scalable and configurable platforms and our vertical SaaS revenue model. Shifting to Slide 15, here we provide a snapshot of the strong progress in our enterprise strategy over the last 18 months. These customers provide not only the validation that the enterprise strategy is paying off, they also provide the case studies and the reference customers for the pipeline opportunities. As said, despite a number of high conviction opportunities shifting into FY '25, we remain confident that enterprise prospects will continue to select ReadyTech as the provider to take them through the much needed transition to cloud. Moving on to Slide 16, what makes our offering so compelling. Why is ReadyTech well positioned to win in enterprise markets? Well, firstly, our open ecosystem provides our customers a highly flexible an agile core system of record, it gives them choice and ability to phase large transformations. Next is our ability to elevate the user experience and deliver better outcomes not only for our customers but also the end user in the student, employee and citizen. The walk when it comes to customer culture, we see this as a competitive advantage, striving to be a true and trusted partner to our customers in this area. We are building a strong reputation. And last but not least, we are determined to capitalize on the AI revolution and lead in areas of innovation as the challenger brand across our verticals. And on that, I jump to Slide 20, which delves into this innovation in more detail, focusing on the major opportunity for AI as AI continues to revolutionize the broader tech industry. Our team is focused on leveraging this capability to add value for our customers and to improve how we run our company day-to-day. ReadyTech has a major advantage in having direct access to large, high-quality data sets. It is this combined with our domain expertise and our culture of innovation that positions us well to add significant value in this space. Indeed, we anticipate ReadyTech's first co-pilot to be available in market in H2 FY '24, augmenting the customer experience, delivering productivity gains and an improved user experience and sentiment from customers so far has been very positive. We'll now turn to Slide 22, where we provide an update on our outlook. ReadyTech is well positioned for continued revenue growth and margin improvement. On our FY '24 outlook, we expect revenue growth in the low double digits, reflecting a shift in timing of a number of high conviction enterprise deals into FY '25. Underlying EBITDA margin to be in the range of 34% to 35%, excluding the impact of LTIP. Labor capitalization as a percentage of revenue are projected to reduce to 14% to 15% from 15.8% in FY '23. We also provide an updated medium-term target for FY '27, the depth and timing of the sales opportunity pipeline underpins organic revenue growth target of over $170 million, EBITDA margins increasing to high 30% and labor capitalization to normalize in the range of 12% to 13% of revenue. Finally, on Slide 23, let me wrap up by covering some of the key takeouts from today's presentation. We have ongoing traction in the enterprise space with organizations continuing to make the shift from legacy systems to cloud-based platforms. We have delivered a significant number of enterprise contracts over the past 18 months. And we have a sizable and high conviction new business pipeline of $30 million and though some opportunities have shifted into FY '25, our conviction on the enterprise opportunity and the strategy remains solid. We've demonstrated our ability to deliver continued profitable growth at strong margins, and we expect our margins to improve further given the success of our enterprise strategy through strong operating leverage and the higher level of recurring revenue. We're capitalizing on the AI revolution in creating new AI-led customer experiences. And as I mentioned earlier, we maintain an active M&A pipeline, and our strategy is focused on acquiring. On M&A, for strategic customers, new capability and entry to new and adjacent verticals. Together with the Board and our executive leadership team, I am excited as ever about the future of ReadyTech and remain highly confident about delivering on our growth agenda. Many thanks, and I will pause now for any questions. Thanks.

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

Just quickly, I guess just in terms of talking about some of the shift in timing of the high conviction enterprise deals. Do you mind just giving a little bit more color on which segments they might have been in? And I guess, just in terms of confidence of when they would be occurring and some of the reasons.

Yes. Thanks, Mitch. So obviously noting the shift in some of the enterprise opportunities into FY '25, I think what we've seen is some extended deal cycles for roughly 4 to 5 key opportunities to be weighted towards the Education segment as well as Government & Justice. Some of these opportunities previously forecast to close in the half. They really have a shift of close dates. I think what's driven that, our view is that it's really been driven by partly the macro environment, 1 that is more cost conscious as well as by funding decisions. I think really important to note here, Mitch, that no major deals in the current pipeline were lost. We remain high conviction on many of these opportunities. And I think what we do know is that a new solution is required and these high conviction opportunities are committed to upgrading their technology, much of which is legacy in nature or end of life. So though deal timing may have shifted and we certainly remain confident that our conversion rates will be maintained.

Government and Education are known to be the fast-moving sectors -- so to understand some of that. Just -- I guess, just following on with the $170 million target now for organic growth that's in FY '27, so I guess just pushed out slightly, is that, again, probably -- is that taking a slightly more conservative view on timing of some of the completions. Do you mind just running through the details behind that?

You're absolutely right. Mitch, this is again due to that timing that we spoke about with a number of those pipeline opportunities that have shifted from FY '24 to FY '25. Part of the impact there is that the growth profile has been extended into FY '27. We thought that it's the most appropriate to update that based on these extended opportunity life cycles. And so certainly expecting and what we're seeing through the pipeline and also what we anticipate an increase in NRR over the next 2 to 3 years through cloud upgrades within our own customer set that we certainly return to that mid-teens revenue growth and targeting now $170 million over organic revenue by FY '27.

And just a final 1 for me. Just on the new customer wins, value was -- or the average value of $123,000 and that was up 29% in FY '23 is pretty solid results. Do you mind just giving a little bit of -- a little bit of color there about how you're seeing that across the segment? So I guess, just ties into the overall momentum you have in those bigger new customer wins.

Yes, Mitch. We are seeing -- going back to the enterprise strategy, this average revenue per new customer, new contract, we had $93,000 in 12 months ago, we're ripping up every half. And what we're seeing here is moving into higher-value customers. So we -- in this half, for the last half, we won those 2 large -- upgrades of 2 large contracts in Victoria, TAFE contracts. They are significantly high value, and we continue to be in consoles and again, get 3 to 4x larger than of average ARPU. And also, in Workforce Solutions, as Marc mentioned earlier, we're 1 of the largest client today in the Workforce Solutions in a company called Seeka from New Zealand. So all the value on enterprise and the breadth and depth of going into the higher value is driving some -- for new clients.

Next question comes from Cameron Halkett at Wilsons Advisory.

Just wondering if we can expand on Mitch's question here around segmental isolation of the contract delays. You cited education there, Marc. I'm just wondering if some of these were perhaps some TAFE contracts you've been talking up for a while or whether perhaps it's more towards colleges and that market?

Yes. So -- that's absolutely part of -- is part of the TAFE story. Cam, we certainly have a number of TAFE opportunities in the pipeline. I think we feel to a degree frustrated in the timing of these and the shift of timing. Partly, as I said, it's been through some funding decisions, but also -- and I think it's 1 of quite complex procurement processes when it comes to TAFE. I think what we do know and why confidence remains high, in fact, in many ways, is higher than ever is that many of these TAFEs are on end-of-life technology and technology that is anticipated will be unsupported in the future and the visibility that we have of those opportunities is strong that conviction remains high. I think 1 other thing that's worth adding there is that, I think very positive is that the 2 TAFEs that came from the AVAXA acquisition, Melbourne Polytechnic and Chisholm TAFE, have both taken the decision to upgrade to our flagship products, which is TAFE-plus, and they're now in transition to that cloud-based system. I think that should be taken as a very positive signal that they have selected our flagship product.

Yes, very good. You mentioned as well, Marc, the contract delays into FY '25, is that sort of a conservative estimate just based on the uncertainty and isolating that down? Is that probably a bit more Q1, Q2 when those land in FY '25? Or again, it's a little bit up in the air.

Yes, a list of up in the air, I would say, I think that's certainly we've seen probably roughly a sort of 6-month shift across some opportunities. But as I say, due to the nature of some of these life cycles and for the reasons they've been extended. Some of those could run a little longer. But I think overall, we've got a really good handle on this pipeline, active discussions and good visibility of procurement processes.

It's worth noting, Cam, our growth pipeline of a high commission growth pipeline is maintained, it has nudged up slightly higher. So we've got opportunities across a number of enterprise contracts not only TAFEs we have hedged. It's just about timing in some of these cases and going through the deal side.

Yes, good point. Last one, just Nimesh, looking at sort of the EBITDA margin guidance, I think it is quite a big second half skew there on margins. So is it the reason there, it just looks like first half OpEx has been front-loaded without the associated revenue. And then therefore that smoothens out will balance us back out in the second half.

Yes. Look, typically, you're ready to -- if you look at the last 3 fiscal years, second half has always been higher. Last year was a $7 million increment between second half and first half. And that revenue in the second half is typically a very high margin. So the line of sight we have from a margin point of view, we'll be well within that target they've given. Also on the expenses side, it's a 15% growth on a PCP basis. On a sequential -- compared to last half, it's only a 3% growth. And so we have very good visibility, and we expect the revenue to be ahead of cost for the full year. And whilst -- the other key point here is of our labor CapEx as a percentage of revenue is moderating as we have stated to the market beforehand. So very comfortable around that 14% to 15% of revenue for the full year.

Yes. You just touched on that, but they're on labor cap, Nimesh, quickly. Can you just expand, given that range as a percentage of revenue was retained for the full year versus the prior year guidance. Are you spending a little bit less in dollar terms? Or you just probably wind up higher in that range than you would have -- if that revenue has come through.

Yes. Look, $8.8 million for the half is $17.6 million for the full year. It's about a 5% growth from last year, Cam, of 5% to 6%. And that's mainly to give salary increase for the existing staff. We're not spending any more and we are actually doing -- being more efficient in our spend. So that comes out to around that $17.6 million on an absolute terms.

The next question comes from Wei Sim at Jefferies.

My first question is just in regards to the changes in government policy and on over student -- net student migration and stuff like that. Has any of this impacted perhaps on the sentiment of the education center and the conversations that we're having?

I really don't think so. Predominantly, the markets that we are involved in education are highly domestic focused. So I understand the question, but I think very limited impact.

And then just in terms of the profile of, I guess, the enterprise customers, what kind of NRR are we seeing from them? Are you able to kind of give us a bit more of a split now that we have started to cycle a bit more on the enterprise side and whether we might see potentially higher NRR from them versus our, I guess, longer-dated customers?

Yes. No, it's a good question. So we -- across the portfolio where we've got 103%, and there is a step-up from prior years. As Marc mentioned, in the out years, we are targeting north of 106%. And to your point, we see on the enterprise NRR to be much higher. So for example, when we move for the ITV cloud upgrades from on-prem to cloud, we're seeing 4x average on the subscriptions as we move to the cloud. Some of the deals Marc mentioned in terms of the AVAXA acquisition platforms, the recurring revenue is up to 1.5 to 2x increase. So we will see disproportionately more increase on the NRR driven by enterprise clients.

Maybe just the last question from me is just on the AI side. It sounds like a great opportunity, be keen to hear given that we're talking about second half '24 launch for the first copilot. What kind of like the revenue model might look like or how we think about the monetization of this?

Yes. Look, I think it's -- certainly, with the release of first copilot, which is in our Work Pathways product. We have certainly other copilots that are also either in design phases. I think the vision here is that across all our product sets, all the key users over time will be augmented with copilots. I think that it's too early for us at this stage to be clear, very specifically about the revenue opportunity, but we certainly expect over time to see that customers will see the value in this, and certainly pay for the opportunity to have augmented users.

Next question comes from Jules Cooper, Shaw and Partners Limited.

Look, Marc, $7 million of sort of new business being closed in the half is pretty strong in our view. I guess, to the extent you feel comfortable, there's a couple of sort of opportunities there and the major wins the RMIT University pilots, we've got a couple of councils in there as well. I just wondered if you could sort of talk to some of the challenges these customers were trying to solve and why you think ReadyTech were selected or engaged on pilots?

I think the really encouraging aspects of the close is that they're well distributed across our different segments. You have -- Nimesh mentioned, organization there like Seeka, which is in the standard economy, that's really a key vertical for us. They're looking to solve through the transition to cloud and an all-in-one platform. This is really all about the fidelity of data and improved governance around areas of payroll and workforce management. In terms of the 2 ERP wins, these are sort of right in our wheelhouse. These are local governments that are going through, again, the cloud transition, looking to get all of the great benefits that come with a cloud-based system. Also to move to a more citizen-centric approach by having self-service to citizens and so forth, that was the key drivers there. And in terms of RMIT, this is a pilot of a product called [ ReadySkills ], which is used by a number of education providers and TAFEs. And it's the ability to, in a much more streamlined way support areas of skills assessment, and we find this particular product is 1 that's very good to establish relationship with large education providers to -- and also open the door, so to speak, for our wider products, including student management systems.

[Operator Instructions] The next question comes from Cameron Halkett of Wilsons Advisory.

Just 1 more on M&A. Obviously, there's a bit of detail there in the deck. But I said just a bit of a high level, what you're looking at, at the moment, is there an appetite for the fourth vertical? Or is there kind of enough to manage at the moment, and it's a bit more capability you might be looking at?

Yes. I think we're more focused on customers and complementary capability at this stage. Then sort of fourth pillar, I certainly think that we have the capacity to acquire and integrate for customers and for capability. And we think we've set a very strong playbook around this. We integrate in a very effective way. We think we've become very good at extracting synergies from those types of acquisitions. So that's the focus. And yes, absolutely have an active M&A pipeline. As always, stay very disciplined. These opportunities have to be on strategy, and they have to be high quality.

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

Thank you, everyone. Thanks for the great questions. Thanks for joining. We really look forward to seeing many of you and sharing more on our results on our upcoming road show. Enjoy the rest of your day. Thank you.

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