Edited Transcript of IRI.AX earnings conference call or presentation 19-Feb-20 10:00pm GMT

Gross R&D spend as a percent of revenue were 21% in the first half, up from 19% in the prior period. During the half, 20% of our total license sales came from brand-new customers, 20 net new logos. This compared to 26 new logos for the full year in FY ’19. Companies like BT, Marriott Hotels and Singapore Power joined IR’s customer community. This new business momentum is critical to our growth aspirations and highlights the quality of our revenues, balanced across maintaining the base, growing the base and adding net new customers.

Across the regions, the Americas was down 10% for the first half. And as previously discussed at our AGM last year, we expect the Americas to return to growth for the full year. New leadership came on board in Q1 and is already having the positive impact expected with a strong performance in Q2. Growth in APAC and Europe combined was 30% up over the prior year with outstanding growth in APAC, 62% up over the prior year. The new leadership in Europe is also getting results with the focus on building a sustainable growth model. Key investments like our first customer summit events in Europe are critical to this strategy.

During the first half, we’ve built a quality pipeline to support second half growth. Importantly, there is a very strong renewals component to this overall pipeline, which has a much higher probability of closure due to the high recurring revenue nature of our business.

Please now turn to Slide 4, and I’ll hand over to Peter to talk through the detailed financials.

——————————————————————————–

Peter Adams, Integrated Research Limited – CFO [3]

——————————————————————————–

Thanks, John. We are on Slide 4. The results for the first half should come as no surprise based on the trading update provided at the AGM and also the early release to the ASX on the 13th of January.

In summary, we have delivered $11.8 million in profit on revenue of $53.2 million, representing a profit margin of 22%. Revenue and operating expenses have both grown 6%. The current period saw some onetime true tax benefits compared to the prior year that had a large unrealized exchange gain. The net of these increases and other stream factors results in a 1% increase in profitability. The good news is that these results include investments in both development and regional capabilities to deliver a strong second half result.

Turning to Slide 5, high quality revenues. The company continues to sign multiyear contracts, yielding term recurring revenues across a diverse range of industries. Some of the most significant transactions during the half were with Fiserv, Capgemini, BT and ANZ Bank.

Turning to Slide 6, presenting our geographic performance. There is some unevenness in the first half performance with Asia Pacific up strongly, Europe with modest growth and the Americas experiencing a decrease. We would anticipate the results to smooth out over the full year and collectively achieve full year growth year-on-year. Anyone who has followed our stock for some time will understand that growth is not always linear, and this period is no different. The diversified geographic portfolio enables a balanced approach to aggregate revenue growth.

Slide 7 presents our revenue performance by product. Unified Communications achieved growth of 10% to $29.7 million through the successful closure of Avaya renewals. Microsoft Skype revenues continues to decline as customers give consideration to migration to Teams. Cisco revenues for the half were stable.

Payments revenue was down 14% due to the cyclical downswing of renewals. Putting this cyclicality aside, new business in payments grew 17% and bodes well for the longer-term trend of this revenue stream. Infrastructure revenues were up 1% and continues the trend of providing high-margin performance on a sticky customer base.

Slide 8 presents our revenue numbers on a restated subscription basis. The calculation of these numbers is based on amortizing license fees over the term of the contract and adding the recurring maintenance. Whilst these numbers do not form part of our statutory reporting, the pro forma subscription equivalent revenues shows growth across Unified Communications and payments revenue streams. Further detail can be found in the appendix to the presentation.

Turning to Slide 9 on cash flow. Cash generated from operating activities is up 39% to $13.2 million or 28% on a like-for-like basis after adjusting for the new leasing standard. Cash receipts excluding debtor factoring is up 14%, noting that these cash receipts come from 2 sources: deals with upfront payments; and deals with payments over time. Cash outflow from investing activities increased 31% to $7.4 million and is predominantly driven by the acceleration of investment in development of new products.

The balance sheet shown on Slide 10 shows no bank debt and $7.6 million in cash. The one significant change between periods is the gross-up of the balance sheet of approximately $7 million as a result of the introduction of the new accounting standards on leases. The company’s primary lease assets are office space both in Australia and abroad.

In summary, the balance sheet remains strong and is well positioned to fund growth.

With that, I would now like to pass back to John, who will take you through the rest of the presentation.

——————————————————————————–

John Ruthven, Integrated Research Limited – MD, CEO & Director [4]

——————————————————————————–

Thank you, Peter. I’m on Slide 11. What does IR do? Being relatively new to the business, it is clear to me that the problems that IR solves for customers are complex and of high value. Given the breadth of problems IR solves, we felt it would add value to provide a few working examples of the areas where IR adds significant value for our clients.

This slide takes 4 very common issues that occur in the payments and communications space and, in plain English, steps you through the problem, why it is complex or difficult to solve, how IR provides a simple resolution and the relevance or value to our customers and, in many cases, our customers’ customer. I’ll quickly step you through one of the examples.

Take the second one. You’re in a retail store at the cash register trying to pay, and your card is declined. This could happen for a whole host of reasons. And bear in mind, retailers could be processing thousands of transactions an hour. It’s even more complex today because of the many payment methods available, swipe, tap, et cetera, and the range of technologies behind this. In real-time, IR’s software is monitoring the transaction and assists the payments operations team to drill down to the root cause of the decline and to enable a faster resolution and provide revenue assurance for the retailer.

We like to think of it as complexity simplified. Complexity because of the sheer transaction volumes, complexity because of the sophisticated technologies that make up the core and payment workloads and complexity driven by consumer demand for an ever-increasing simple or Apple-like experience.

Moving to Slide 12. The real value of IR is the blue-chip customers and the quality of the revenue base, validated by the recurring nature of these revenues at greater than 86%. At the same time, this high-quality customer base continues to grow with the addition of new logos. 20 new logos were added this last half, including names like BT, Prisma Health and Marriott Hotels.

Slide 13 highlights the dynamics of the ongoing change as enterprises move some of their workloads to cloud or SaaS environments. It’s important to understand IR’s strategy and the progress we are making against this strategy. IR’s high-quality enterprise customer base are large financial institutions, retailers, telcoms and the like. Our strategy is to leverage our dominant market position on-premise and to support our customers on their journey or evolution to cloud. We will recognize that this evolution will go through a hybrid phase, meaning part of the business process runs on-premise and part runs on SaaS or in the cloud. We are executing on this strategy, having launched our SaaS platform with plans to bring new and complementary products to market, where customers can consume them as a service or Saas, on-premise or as a hybrid solution.

Moving to Slide 14. There is no better validation of the strategy being executed than results. In our last earnings announcement, we talked about the mission-critical nature of our software, the fact that it is sticky and of a recurring nature. Leveraging this position, we need to do 3 things and do them really well: maintain the base, grow the base and add net new customers. Ours is a multi-vector strategy. We’re not single point-sensitive or betting the farm on one big play.

In the last half, a great example of maintaining the base was our largest deal in which we consolidated contracts with Fiserv after their acquisition of First Data Corporation. In simple terms, they consolidated towards us, not away from us.

Increasingly, we are cross-selling our solutions within existing customers. A great example of this is a recent deal we completed with ABSA, one of Africa’s largest financial institutions. They’ve been a long-standing payments and infrastructure customer and they have now licensed our UC and call center solutions in a multi-platform environment to manage their video and voice platform.

To round it out, GSK or GlaxoSmithKline, a large pharma company, became a new customer when looking for a single pane of glass to manage their collaboration platform with further plans to extend the rollout beyond the U.K. and Europe.

As I move to wrap up, Slide 15 highlights a number of the key drivers for the second half. Our increased investment in R&D saw the launch of the new SaaS platform in December. And leveraging this, we will bring our new — or our first new SaaS product to market this half in the payment assurance space. This is new with complementary functionality for our payments customers. It is important to note that SaaS revenues will be recognized over time, not upfront. We will ship Prognosis 11.8, which will include support for Microsoft Teams and, in fact, will be our first hybrid product. This means that part of the solution will be on-premise and part will be Saas.

Additionally, we’re working hard to ensure that existing customers are upgrading to the current release to ensure they are benefiting from the latest functionality. Proving this is that greater than 40 customers have upgraded to the 11.7 release that we shipped in December.

Through the first half, we continued to build quality pipeline to support continued growth in the second half. H2’s pipeline supports our expectation that the Americas will return to growth as the new leadership continues to have a positive impact. Greater than 50% of the license outlook for H2 is renewals, providing a strong base on which to grow. We also anticipate a strong infrastructure half based on the pipeline that is in play.

We’re expecting our new business momentum to continue with a high number of new logo opportunities in play in our second half pipeline. Additionally, changes in our Professional Services business, including global leadership, is having a positive impact. With a strong backlog, we expect this part of our business to continue to grow.

In summary, we have a sound business model based on an enduring value proposition. Our global customer base is world-class. Diversification across verticals and geographies derisks concentration in any one market or segment. As we have seen this last half, with the Americas down, there was an offset through excellent and sustained growth in Asia Pacific. Our revenue base is balanced and high quality.

As you’re seeing payment networks across the globe are becoming more pervasive, more complex with accelerating transaction volumes, IR solutions are increasingly relevant. Consumer expectations continue at a frenetic pace. These expectations drive demand for performance and user experience management. We believe IR plays a critical role in creating clarity and insight in a connected world.

That concludes the formal part of today’s presentation, and we will now turn it over to the moderator to take questions.

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions) Your first question comes from Chris Savage with Bell Potter Securities.

——————————————————————————–

Chris Savage, Bell Potter Securities Limited, Research Division – Senior Industries Analyst [2]

——————————————————————————–

John, Peter, the new SaaS platform, was that ahead of schedule? I’m expecting it more to be around mid this calendar year.

——————————————————————————–

John Ruthven, Integrated Research Limited – MD, CEO & Director [3]

——————————————————————————–

Yes. Pretty much on, important to think about our SaaS architectures, both the platform and then a set of products that run on that. So we’ve brought the platform to market. But in terms of the first product, as we announced, we’re in the beta phase or beta customer phase with that now, and we expect the first product on that platform to go geared towards the end of the second half.

——————————————————————————–

Chris Savage, Bell Potter Securities Limited, Research Division – Senior Industries Analyst [4]

——————————————————————————–

Okay. And John, you said there would be complementary services on that platform. So can I assume there’s no cannibalization risk for Prognosis?

——————————————————————————–

John Ruthven, Integrated Research Limited – MD, CEO & Director [5]

——————————————————————————–

We’ve got a fairly detailed and structured phased rollout of those products. And it’s the first product that was in the payment assurance space, the target market, so that is a part of the market that we don’t reach today. And that’s based on the size of the customer and the complexity, so that they would be unavailable to us in a traditional large, complex on-premise deployment. So we don’t have concerns around cannibalization.

——————————————————————————–

Chris Savage, Bell Potter Securities Limited, Research Division – Senior Industries Analyst [6]

——————————————————————————–

Okay. And maybe one for Peter. Just maintenance revenue was down slightly. Any particular reason for that? And should we see it reverse in the second half?

——————————————————————————–

Peter Adams, Integrated Research Limited – CFO [7]

——————————————————————————–

So in terms of the maintenance revenue going down, the primary reason for that is — there are 2 factors actually: the perpetual to maintenance conversions that continue to occur that put a drain on the maintenance; the second reason is our retention rate is a little bit down compared to history, so it’s 93%. The primary loss there was through a Microsoft customer who did not renew. In terms of the full year outlook, we probably see maintenance broadly maintaining a flat trajectory.

——————————————————————————–

Chris Savage, Bell Potter Securities Limited, Research Division – Senior Industries Analyst [8]

——————————————————————————–

Okay. And last question, probably more one for you, John. You mentioned hybrid. A bit of a general question, but did the hybrid environment work for you or against you?

——————————————————————————–

John Ruthven, Integrated Research Limited – MD, CEO & Director [9]

——————————————————————————–

We believe it works very much in our favor. And the rationale to that perspective is that our customers are large enterprises that have highly complex environments. The — and this has been validated in conversations with financial institutions, the large UC players like Cisco and Avaya, that the segment of customers where we’re heavily penetrated are going to be slow to move to a pure cloud environment. But many of them are experimenting with moving workloads to AWS and other players.

So the important part of our strategy is to ensure that we can take the customers on that journey so that they can move at their own pace. And in the first hybrid product that we will be able bring to market this half, which is complementary with the release of 11.8, that solution will be architected in such a way that a customer will consume part of that product on a SaaS — from a SaaS environment, and part of it will be deployed on-premise.

——————————————————————————–

Operator [10]

——————————————————————————–

(Operator Instructions) The next question comes from Michael Ryan with Select Equities.

——————————————————————————–

Mike Ryan, Select Equities Pty Ltd., Research Division – Senior Institutional Adviser [11]

——————————————————————————–

Just on Page 21, you’ve got the pro forma subscription revenue, which looks quite impressive. I’m just curious on perpetual sales, which you’ve got as $2.7 million in the half just finished, and obviously, it’s up. Where are those potential sales and which areas?

——————————————————————————–

Peter Adams, Integrated Research Limited – CFO [12]

——————————————————————————–

So focusing on the current half — so actually, in terms of trending, it can vary from 1 year to the next. But in terms of the current half, the last perpetual sale was actually in Asia Pacific. And I guess in terms of our approach to when do we do perpetual sales and then don’t we, our primary model is always based on some recurring. So clearly, if the prices rise and the circumstance is right, we will actually accept the perpetual sale.

——————————————————————————–

Mike Ryan, Select Equities Pty Ltd., Research Division – Senior Institutional Adviser [13]

——————————————————————————–

Is that the payment period?

——————————————————————————–

Peter Adams, Integrated Research Limited – CFO [14]

——————————————————————————–

Yes, it was.

——————————————————————————–

Operator [15]

——————————————————————————–

(Operator Instructions) There are no further questions at this time. I’ll now hand back to Mr. Ruthven for closing remarks.

——————————————————————————–

John Ruthven, Integrated Research Limited – MD, CEO & Director [16]

——————————————————————————–

Thank you, everyone, for joining our first half results call this morning. In closing, I would reiterate a couple of key messages that I hope came up in our presentation and in the supporting documentation. We believe that we’re very well-placed for growth in the second half and that that confidence is based on the strength of the pipeline that is in place, both the quantity and the quality of that pipeline. We’re expecting a return to growth in the U.S., which, as you all know, is our major market. And in closing, we are expecting a good second half. So again, thank you for your ongoing support and interest in Integrated Research, and we look forward to meeting a number of you over the next couple of days.

——————————————————————————–

Operator [17]

——————————————————————————–

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