ReadyTech Holdings Limited (RDY) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the ReadyTech FY '26 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Marc Washbourne, Co-Founder and CEO. Please go ahead.

Thank you, and good morning, everyone. I appreciate you joining ReadyTech's FY '26 Results Call. I'm Marc Washbourne, Co-Founder and CEO of ReadyTech, and I'm joined today by our CFO, Bryce Thompson. I refer today to our results presentation, which is now available on the ASX. The headline today is that FY '26 was a year of mixed financial performance, but one where we strengthened the foundation for growth, aggressively pursued AI transformation and took decisive action on cost and capital allocation. On Slide 2, there are 4 things I'd like investors to take away today from the call. First, FY '26 finished within revised guidance with cash margin reaching what we believe is a low point. Second, evidence supporting our enterprise strategy strengthened materially. The Victorian TAFE common platform win validates several years of investment in Ready Student, while our enterprise pipeline continued to grow. Third, AI is becoming increasingly tangible. We are creating new customer value through products such as Orqestra while seeing significant improvements in engineering and operational productivity. And fourth, our major investment cycle has peaked. We've taken meaningful action on costs. R&D investment is moderating, and we expect material margin improvement through FY '27. When we put this together, we have high conviction in our strategy. Moving on to Slide 5. FY '26 revenue was $125 million, up 2.6% and within revised guidance. Subscription revenue was $103.8 million with recurring revenue representing 83% of the total. Underlying EBITDA was $35 million, representing a margin of 28.1% and underlying cash EBITDA was $15.8 million, representing a margin of 12.6% at the lower end of our guidance of low to mid-teens. There are 2 different dynamics beneath the group result. Our flagship products continued to compound, and that was offset by elevated churn in parts of the mature portfolio and with enterprise customers where contracts are signed, but subscription revenue is yet to commence as implementations progress. Importantly, the investment base and capital allocation approach are now evolving, and Bryce will cover more of that in detail shortly. Slide 6 shows the actions that we have taken. On financial performance, we finished FY '26 within revised guidance and strengthen the quality of the balance sheet through tighter working capital and cash discipline. The focus in FY '27 is on greater reliability and predictability of performance. On costs, as I said, we have enacted a cost management program, and we have delivered approximately $6.5 million of annualized savings since January with a further $3.3 million of annualized savings expected to be realized through FY '27. We have also become significantly more disciplined around capital allocation. Our portfolio is increasingly assessed through a Rule of 40 and return on investment lens. Our best-performing products will continue to attract capital where returns are weaker, we will rightsize investment. And in some cases, we may exit products. This is about creating a clearer, faster and stronger ReadyTech with fewer competing priorities and capital concentrated where we have the strongest right to win. Turning to AI on Slide 7. We believe ReadyTech is structurally well positioned for an AI world. Our software operates in regulated markets with deep domain complexity. We own core systems of record and workflows around them and thousands of industry-specific rules and edge cases. This makes us well placed to become a trusted partner as customers adopt AI. But increasingly, with AI, what matters is evidence of payback, and we are seeing that in a tangible way at ReadyTech. Our new AI product Orqestra, we have a founding partner program, and that is accelerating. Our AI-enabled engineering Super Squads are generating approximately 3 to 4x the development velocity in areas where they have been deployed. And our AI operations team is applying AI across customer experience and delivery. The opportunity for us is on both sides of the equation, new value and new revenue for customers and at a lower cost to develop and deliver our software. Slide 8 brings the year together. The Victorian TAFE common platform contract win was a major milestone. We launched our AI intelligence platform, Orqestra. We've demonstrated material AI-driven engineering productivity. And in local government, we have begun getting legacy customers all the way through on to Ready Community. There were also a number of areas requiring action. Churn remained elevated across mature products, particularly in managed payroll and in SME education. The VETtrak cyber incident required significant focus. Customer restoration and remediation are complete with enhanced controls embedded across the group. And local government implementation velocity took longer to improve than planned. These areas are well understood, and we have clear management responses underway. On to Slide 9. Turning to Education and Work Pathways. The headline, of course, is the Victorian TAFE common platform win. The agreement covers 11 Victorian TAFE institutes with another 4 dual sector providers able to procure ReadyTech software. This is strategically significant. Over several years, we have invested to make Ready Student a genuinely enterprise-grade cloud-native platform capable of serving complex tertiary institutions. Within the Victorian process, following a competitive tender, this strongly validates that investment and provides an important reference for the broader TAFE and higher education market. Our first university implementation with Avondale is also progressing. Within Work Pathways, enterprise pipeline converted strongly in the second half with WISE and Salvations Army contributing $1.9 million of new sales in ACV. Without major enterprise implementations coming online in the year, segment revenue was broadly flat at $43.1 million with EBITDA of $19 million. While FY '26 financial performance was relatively stable, the strategic position of this segment has strengthened materially. Moving on to Slide 10. Our Workforce segment revenue grew 10.4% from $34.5 million to $38.1 million. Margin was softer as a result of H1 investments in go-to-market. Ready Workforce continues to demonstrate what we want our flagship strategy to deliver. Ready workforce subscription revenue grew 25.4% in FY '26, and that was driven by new logos, deeper vertical penetration and customer and module expansion. We added 46 new customers during the year, including enterprise wins in our priority sectors. Our AI screening assistant is now live with around 80% of customers and is reducing time to placement by more than 20%, creating measurable value and supporting pricing uplift. The offset remains elevated mature churn, particularly in managed payroll services, which continued to weigh on the segments. But the trajectory of Ready workforce remains strong, and we expect it to represent an increasing share of segment revenue over time. On to Slide 11, turning to Government & Justice. In local government, the opportunity remains significant. The challenge has been converting that opportunity into implementations fast enough. We are pleased to report that we now have 5 customers successfully migrated in Q4 from legacy software on to Ready Community. That establishes the upgrade pathway and allows us to systematically work through the backlog. In Justice, implementation of the Workplace Injury Commission in Victoria contract is progressing well. Segment revenue was broadly stable at $43.8 million, with lower margins reflecting investment in leadership and some aging debt write offs. The priority now is converting stronger product capability, leadership and pipeline into improved financial performance. On to Slide 13. This describes our next phase, clearer, faster, stronger. Clearer means greater portfolio focus. We'll go harder where we have a genuine right to win and narrow our investments where we do not. Faster means embedding AI throughout engineering, product and delivery while launching AI native products capable of generating new revenue and stronger means disciplined capital allocation, deeper customer relationships to improve retention and expansion and building an AI native workforce. The objective is straightforward, sustainable enterprise growth and operating leverage. Our enterprise opportunity is increasingly visible on Slide 14. High conviction gross pipeline increased from $35.3 million at the half to $39.8 million at the year-end. That comprises $16 million of first year subscription opportunity and $23.8 million of services. Education is particularly strong with the Victorian TAFE win adding pipeline directly and materially adding to our credibility. Local government momentum is shifting as early customers establish the pathway to cloud migration. And workforce continues to see stronger enterprise opportunities across its priority verticals. The services weighting reflects the implementation effort required for enterprise customers, an area where we expect AI to improve speed and economics over time. I'll now hand over to our CFO, Bryce Thompson, to share some financial context around the strategy.

Thank you, Marc, and good morning, everyone. Really appreciate you joining the call. During FY '26, we signed $18 million of new enterprise contracts and major upgrades, which is a healthy step-up on our FY '25 performance. That number comprises $8.7 million first year subscription revenue and $9.3 million of services. Now many of these implementations are already underway and typical time frames for our implementations vary by segment and also by contract type from 90 days to 18 months or more for our most complex implementations. This is evidence that we are winning enterprise customers. The opportunity for ReadyTech is to become faster and more predictable at converting these wins into recurring revenue, and we believe AI will help with that over the coming years. If we move to Slide 16. Our R&D investment cycle has peaked and it will moderate into FY '27. Over several years, ReadyTech deliberately invested behind Ready Student, Ready Workforce and Ready Community to build enterprise-grade platforms. That capability is increasingly being validated through our contract wins. During FY '26, we also undertook a major project to consolidate 11 outsourced engineering providers into a single offshore center of excellence, which will convey some productivity and cost benefits to the group. R&D investment will moderate in FY '27 and beyond through product maturity, lower headcount and greater engineering productivity. This will create an important source of operating leverage for the business. Slide 17 is a slide that we used at the first half, and it illustrates an important dynamic for ReadyTech. Our flagship products are performing well. They have delivered a 10.6% total revenue CAGR and a 13.2% subscription revenue CAGR, led by Ready Workforce at 25.4% and Ready Student at 21.8%. At the same time, our mature products accounted for 67% of our FY '26 dollar churn. Our approach to these groups is increasingly differentiated. In flagship products, we will invest judiciously for growth through new customers, migrations, expansion and also AI. In our mature products, we will focus on retention and pricing. We will focus on migration and disciplined harvesting of our products and our customer base. That distinction increasingly governs how we will allocate our people and our capital across these products. I'll now hand back to Marc to round out the strategy update.

Thanks, Bryce. Slide 18 highlights Ready Student and the progress of our enterprise education strategy. Ready Student is now a cloud-native enterprise-grade student management platform for tertiary education, and it's been codesigned with the early Victorian TAFE customers. The Victorian TAFE common platform win is an important validation of that investment following an intense and competitive tender process. FY '27 is about working across Victorian TAFE on common platform planning and progressively converting that contract win into implementations and recurring revenue across these opportunities as well as expanding across the wider Australian TAFE and higher education market. On to Slide 19 and turning to an exciting development, which is Orqestra. This is our most significant AI product release to date. Orqestra connects AI, organizational knowledge and customer data while keeping the customers' trusted system of record at the center. We now support 33 live integrations with Orqestra and more than 5,000 tasks have been executed. Our founding partner program is helping refine use cases and the commercial model, which we currently expect to be largely consumption-based. It is still early, but we are increasingly see Orqestra becoming an important additional layer of value across our customer installed base. On to Slide 20 and the other side of AI is productivity. Within education engineering, AI-enabled Super Squads have increased measured development velocity by approximately 3 to 4x in the areas where that model can be deployed. Within customer support, AI is drafting more than 85% of customer responses, and we are beginning to apply similar frameworks to customer onboarding and implementations. These gains should compound over time, increasing output, improving customer outcomes and strengthening the economics of the overall business. I'll now hand back again to Bryce to step through more of the results.

Thank you, Marc. In this next section, I'll focus on the financial results, also the cost actions that we have taken during the year and how we are thinking about capital allocation and operating leverage for the business going forward. If I can ask to move to Slide 22. Total revenue increased 2.6% to $125 million in FY '26. Subscription revenue was $103.8 million with an additional $21.2 million of services revenue. As Marc has already covered, our subscription revenue profile reflects 2 main factors. Firstly, we did see elevated churn in parts of our mature portfolio. ReadyTech internally has set up strategies to help us identify early and control elements of that churn moving into FY '27. Secondly, a number of our signed enterprise customers remain in implementation, and they are not yet reflected in our subscription revenue base. The signed enterprise base and strengthening pipeline support confidence in future subscription revenue growth. Our focus is on improving the speed and predictability with which contracts convert into recurring revenue. Slide 23 outlines our underlying cash EBITDA bridge. Underlying cash EBITDA was $15.8 million in FY '26, representing a margin of 12.6% compared with 16% in FY '25. The margin reflects a period where strategic investment and cost inflation ran ahead of revenue growth. Importantly, that investment cycle has peaked and the cost base has now been reset. In 2026, we have removed 62 roles from our business. And to date, we have delivered $6.5 million of annualized savings with a further $3.3 million expected through FY '27. The majority of these actions have, therefore, already been undertaken as at today. Our focus is on now capturing the operating leverage within our business. On Slide 24, Marc has already given a detailed overview of the segment financials. Education and Work Pathways revenue was broadly flat at $43.1 million with an EBITDA contribution of $19 million. Workforce revenue increased 10.4% to $38.1 million, driven primarily by the success of Ready Workforce. That segment contributed EBITDA of $12 million. Government and Justice revenue was again broadly stable at $43.8 million with an EBITDA contribution of $10 million. The financial priority for FY '27 is converting the investments we have already made into improved growth. Moving on to Slide 25. Our balance sheet remains strong. A highlight of FY '26 was our focused debt management and collections, which drove 108% cash conversion in the year compared with 85% in FY '25. Adjusted net debt reduced to $32.5 million with $27.5 million of cash on the balance sheet, also reflecting the strength of our Q4 billing cycle. Net debt to EBITDA remains approximately 1x with interest cover of 8.8x. This leaves us with significant financial flexibility. On Slide 26, we cover what you will hear from us is an increasing theme for ReadyTech around capital allocation. Marc has already mentioned how we have strengthened our approach in this area. Rule of 40 performance, both current and expected, will increasingly govern our investment decisions. Products capable of generating strong sustainable returns will continue to attract capital, whilst where returns are weaker, investment will be rightsized. On the right-hand side of the slide, we cover some of the initiatives that we have already undertaken, reweighting our engineering effort, addressing our third-party software and contractor costs. We have reviewed hosting and our property lease expenditures. And most importantly, we have embedded AI more deeply across our engineering teams and our service delivery and support teams to help drive efficiencies. Our cost management actions have substantially already been taken with the benefits progressively flowing through FY '27. I'll now hand it back to Marc to wrap up the presentation.

Thank you, Bryce. If you move to Slide 28, and we'll move to the all-important outlook for FY '27, where we are guiding to revenue of $128 million to $132 million and an underlying cash EBITDA margin of 15% to 17%. We also expect further margin improvement into FY '28 as the benefits of our actions annualize. Several things underpin the outlook. Firstly, our enterprise pipeline is stronger with signed implementations progressing towards subscription revenue. Our flagship products continue to grow. Victorian TAFE strengthens our confidence in education and local government upgrade momentum is improving. At the same time, changes to our cost and R&D base provide a stronger foundation for operating leverage. Execution here remains critical, but we now have much greater clarity on where we invest and the outcomes where we need -- that we need to deliver. On to Slide 29 to wrap up, let me finish with why we remain confident in ReadyTech's long-term opportunity. We operate in mission-critical software in large defensive markets where regulation, complexity and trust create genuine barriers to entry. Our flagship investments are increasingly being validated through new customer wins, references and a strengthening pipeline. AI further strengthens that position, creating new customer value while improving our own productivity. We have also reset the cost base, sharpened portfolio decisions and concentrated resources where we have the strongest right to win. So our focus on -- sorry, our focus in FY '27 is on conversion, converting enterprise wins into recurring revenue, converting AI into customer value and converting productivity gains into stronger margins and ultimately, shareholder returns. We have conviction in the strategy and a clear execution agenda. Thank you, Bryce and I will now open the line for questions.

Your first question comes from Cameron Halkett at Canaccord Genuity.

Can I just ask around the revenue guidance outlook? I suppose just reasons for the tepid kind of revenue growth rate you're expecting relative to your history? Like is that churn cycling through a bit more? Is there, I suppose, a lack of implementation expected in the year ahead or any mix? Just some help there would be good.

Yes. Thanks for the question, Cam, and I appreciate that. We look at revenue for FY '27, and I'm not surprised at your comments there. It's not the revenue growth that we want to be seeing from the business and not what we expect to be seeing going forward. I think there is a couple of things going on. Look, services, Cam, I would expect that to be broadly in line with what we've done in previous years, right? To deliver services, we need people. At the moment, we're not adding people to those consulting and implementation teams, but we will broadly land in line with where we have been in the previous years. If I draw your attention to the new business wins in FY '26, we added $8.7 million of subscription revenue. As you know, that doesn't all land in FY '27, but we're obviously cycling the adds that we had in FY '25 and FY '24 where projects are coming online. So you can think of that number as a proxy for where subscription revenue growth will go in FY '27. And that will take us close to, call it, almost $110 million of subs. I think what we are seeing, and this is what you picked up on is the elevated churn and downgrade cycle is probably erasing some of the gains that we typically get from price and upsell. So our strategy going forward is to get on top of those churns and downgrades, make sure we control them, and we believe that we have that well in hand now going forward. And if you do the math on the bridge I just gave you, you'll land right in the middle of our guidance range.

Great. And I suppose just around that, you've provided the pipeline as you usually do, and that number be at a record. So I guess just based off your comments and outlook, should people be thinking that conversion of that pipeline is probably a bit more second half weighted as you see things at the moment?

Yes, I think -- look, the first thing I'd say is the conversion of that pipeline is lumpy because the contracts are lumpy, right? And so if we look at the behavior of conversion over the last few years, sometimes it's actually been equal weighted first half, second half. Sometimes it's been first half weighted and sometimes second half weighted, right? And literally, that has been the behavior over the last 3 years. I think the more complex thing for you as an analyst bridging revenue is not only is it when do we sign these contracts, but it's how long is the implementation time frame for those contracts to come through. If I look at the activity in FY '27 and what we are expecting from this pipeline, I would say, yes, I think our second half weighting will be greater in FY '27. But again, I draw you back to the prior comment, trying to predict how that comes online and how that gets staggered based on a typical implementation cycles and the broad range of implementation time frames we've got across the business is obviously very complicated.

Yes. And perhaps last one is just around, I suppose, the government segment, I suppose. So either yourself or Marc, can you kind of summarize, I suppose, the year just gone? Has the -- I suppose, been just the lack of new deals as your win rate declined? Has churn been higher? Has it been a mix of factors? That would be helpful, please.

Yes, a bit of a mix, Cam. I think the #1 thing that we called out in the half and will continue to be a focus is the unblocking or unlocking the backlog that we have of upgrades. And the big breakthrough here is that we have 5 upgrades from the older technology, the legacy technology to the Ready Community platform in Q4 and across into Q1 for FY '27. So that really now unlocks the opportunity to transform more. We have another 12 to 13 implementations and upgrades that are signed. So I think that's been part of it. We've certainly seen a degree of churn in the government business as well as some of our customers have sought other cloud-based systems and run processes. However, I think now the evidence that we have an upgrade pathway, we have successful implementations that we really start to get our arms around that. And I think we see more than green shoots in that government segment.

The next question is from Apoorv Sehgal at Jarden.

A few questions from me, please. First one, just on the Victorian TAFE network contract win. Are you able to share what kind of dollar revenue earnings contribution you're factoring into FY '27? And from a ramp-up perspective, is there meant to be some sort of like multiyear ramp-up beyond '27 in terms of how that phases through?