This thing isn't dead just yet, apparently:

Still glad I sold out at ~$1.36 a few years ago (at a sizeable loss).

I'm still not sure of the relevance of their products these days, but with the company now guiding for $18-25m in EBITDA for FY24, the company was (prior to today's pop) on ~4x EBITDA and currently 5.2x

It piques the interest of my inner value investor, but that guy has led me into a number of poor investments. Sometimes things are cheap for a reason.

oof, the turnaround that just wont turn.

Sales momentum slowing, the Americas is struggling, an operational review underway, TCV to decline..

The business was previously calling for growth in net Profit, now they anticipate NPAT to drop.

You can read the latest update here.

This used to be one of the best companies on the ASX, with a long history of highly profitable growth. But I think the world has changed on them, and they were caught napping.

Shares look cheap on a PE basis, but i worry this is a classic value trap. Not that it's going out of business anytime soon, but its best days are well and truly behind them in my opinion.

As expected, last year was a tough one for Integrated Research, with revenue and earnings down 29% and 67%, respectively. 

(ASX presentation here)

For a business that is supposedly providing "mission critical" services, the drop appears exceptionally brutal.

To understand it properly, you have to go beyond deal deferrals and covid impacts.

IRI has historically booked a lot of its revenue up front. This not only makes things more lumpy, but isnt perhaps the best way to match expenses with revenues. It isnt 'wrong' per se, and when the company is growing you dont notice it as much, but it does exaggerate the real economic hit to the business (as well as the levels of growth in prior years). 

IRI is transitioning to more of a SaaS model and when looked at through that lens the drop is less severe.  For example, while Npat was down 67%, operating cash flows were down only 14%. 

At any rate, there's a genuine impact to this change of model, one that is negative at first on statutory measures or revenues and earnings.

The key thing is that the core economics of the business, and the actual cash flows, are what matters and they are unchanged. And under a 'business as usual' scenario you have a business throwing off $10m in free cash flow per year (roughly the same as last year).

At a $350m market cap and with a debt free balance sheet, it doesnt seem too bad -- so long as the company can return t growth.

As i've noted before, they have a long history of adapting and exploiting technological change, and continue to invest heavily into new products.

But while the company itself touts a large addressable market with a new and expanded product set, it's too early to tell if they will get any traction there.

If they can return to anywhere near their 2019-2020 EPS levels (13c), which i think is possible in the next 2-3 years, i think we'll look back on the current price as quite cheap.

If growth doesnt materialise, the market multiples investors are preparted to pay could shrink further.

I'm maintining my position for now.

Integrated Research says it is expecting a significant improvement in the second half of FY21, with H2 revenue expected to come in between $40-45 million (around 25% higher than the $34.1m generated in the first half).

That's expected to translate into a net profit of between $4-7m for the second half, up from just $0.1m in the first.

Although that's very encouraging, it's worth remembering that the current half will still come in well below that of the previous corresponding half. In FY20, second half revenue and NPAT were $57.7m and $12.2m respectively. 

For the full year, Revenue is expected to be between $74.1-79.1m (compared to $110.9m in FY20), while FY21 net profit is forecast at between $4.1-7.1m (compared to $24.1m in FY20).

The company has blamed the current challenges on shorter term contracts, tighter customer budgets and approval processes, as well delays associated with customer indecision on future environments.  Maybe that's right, but it doesn't exactly underscore the "mission critical" nature of their product set that is often touted.

At the current price ($1.99), and taking FY21 guidance at the midpoint, shares are trading on a forward PE of 61. So clearly the market is expecting profits to normalise as customer confidence returns and as new products capitalise on some of the structural trends underway (increased cashless payments and remote working).

Eg. IRI is only on ~15x FY20 earnings

To be honest, my conviction has waned of late, as I'm unsure as to what extent their products will be disintermediated by other SaaS offerings -- many of which seem to have inbuilt diagnostic and monitoring tools, and are increasingly offering enterprise grade solutions (eg Zoom).

The unweildy enterprise solutions of yesteryear really made something like IRI's Prognosis product invaluable -- but will the more modern 'plug and play' offerings still require this? I'm not sure, and I don't have the direct experience to accurately gauge what is happening at the coal face.

Integrated Research delivered a very underwhelming, though not unexpected, set of numbers for it's first half to Dec 2020.

Revenue was down 34% to $34.1m which delivered only a sliver of profit ($129k). Down 99% (!)

Reasons previously given include covid induced extended sales cycles, purchase deferrals, shorter commitment periods etc. Essentially, poor sales execution.

FX also played a part.

On the plus side:

• Customer cash receipts were down only 7% thanks to good conversions and no material bad debts.
• Operating cash flows came in at over $11m, down only 15%
• Total expenses were reduced by 15%.
• There were 16 client wins over the period, including FedEx. 24 new clients are forecast for the current half.
• Remote working, cashless transactions and the transition to SaaS remain strong long term tailwinds
• Expanded addressable market with new product launches and ongoing commitment to R&D
• The company also presented results on a subsciption proforma basis (pretending, for the sake of illustration, that revenues were recognised under a subscription model). Unsurprisingly, this showed a much smoother picture of growth; roughly 13%pa on average over the last 6 years. It's easy to be cynical with this transformation of the statutory results, but the business is actualy transitioning to a subscription model and (along with the operating cash flows) it does give a useful lens into the cash generating potential of the business.

On the downside:

• That was a very big drop in revenues, and shows how the business -- as it currently reports -- is so dependent on winning new work and renewals.
• Non-renewals of licenses was~$5m, 9% of total revenue. Not encouraging. The product set is meant to be "mission critical"
• Net cash only at $1.7m ($6.5m in borrowings offsetting $8.2m in cash
• While it's a positive that management seem to acknowledge poor sales execution, that can be a hard area to turn around
• New products may not get traction, and may need to writedown some of the investment
• Transition to SaaS is a long term positive, but reported revenues will take a hit in the interim.

Overall, I still like Intergrated Research. It's stood the test of time -- not just in longevity, but in adaption and ongoing growth. I think it will still be around in 5 years and earning more than it did pre-covid.

At the same time, I could easily see shares underperforming for a good period while the market waits for validation of a recovery in profits and growth.

Visit my IRI company report for the valuation.

Disc: Held

2 weeks after warning of a weaker first half result, Integrated Research has further lowered guidance -- and by quite a bit -- referencing the unpredictability of business closures for the remainder of the year.

Last year, IRI delivered $53.2m in first half revenue. On the 18th Dec they said they expected $41-47m, and now they are saying the result will be between $34-37m (a ~20% further reduction in guidance).

Net profit was $11.8m in H1 2019, and a fortnight ago they told investors to expect between $5-8m. Today they said profit would be between $0-2m (a further 85% drop in guidance at the midpoint).

Obviously not great news, and a very big decline on what was already disappointing guidance.

As stated previously, for long term holders the question is whether this is a structural issue or a rough patch for an otherwise strong business. 

I see it as the later, for now.

Update here

Integrated research has said that first half revenue will be between $41-47m, compared to $53.2m for the prior corresponding period.

Profit is expected to be between $5-8m, down from $11.8m. That's a very sizeable drop!

That guidance is also a very wide range, and reflects the uncertainty of business closures and deferred purchasing decisions resulting from Covid.

The business also reiterated its sensitibvity to FX movements. As said at the AGM, a 1c change in the USD/AUD changes revenue by ~$1m.

The AUD has appreciated 12% against the greenback over the current half.

Of course this isnt good news, but as a long-term shareholder i'm not bothered at all. Seen it all before.

The market price is remarkeably volatile, but the fundamentals are anything but. This doesnt change the cash long-term generation capacity of the business one iota.

This is a business that has ~20% *NET* margins, 30% ROE, consistent and attractive growth, genuine global leadership, super sticky customer base and an impeccable dividend history.

On average, i think investors can expect upper single digit earnings growth over the next 5-10 years. And you can get access to that for a PE of 22 and a yield of 2.3%.

Hopefully shares fall more and I will top up.

You can read the ASX announcement here

At its AGM today, Integrated Reserach mentioned that revenues for the first 4 months of FY21 are behind the prior corresponding period. Covid, it seems, has acted to lengthen sales cycles and defer purchase decisions. FX factors are also having an impact. 

A 1c move in the AUD/US exchange rate impacts revenue by $1m.

Beyond these near term factors, new SaaS products are expected to build in the second half and lead to "meaningful contributions in FY22 and beyond".

Factors such as remote working and cashless transactions are a longer term structural tailwind.

The market was down a bit today on this news, but I dont think it signals any longer term problems with the business. A brief look at its long hitsory shows an amazing resiliance, insanely high net margins and consistent long term growth for this world leader.

disc; I hold.

You can read the CEO and CFO update here, while the Chairman's address is here

Integrated Research has delieverd profit at the top end of its guidance range, with NPAT up 10% to $24.1m.

This is off the back of a 15% lift in license sales and a 10% rise in total revenue.

The payments segment was the only area to go backwards, with sales down 14% (after doubling in FY19).

Overall, net margins remain super striong at 22%. You wont find too manay ASX companies that can boast such a level.

Just a wonderful business with a long term histpry of profitable growth. I expect upper single digit profit growth for the foreseeable future.

There was some great buying opportunities over 2018-2019 as the market worried over short-term, non-structural issues. But with a current PE of 35 and a yield of 1.8% yield, it's a less attractive buy today.

Results here

Integrated Research said it expects to report record revenue and profit for the year ending Jun 2020.

Revenue should come in 9-10% higher at $109.5-$111m.

Profit likely between 8-11% stronger between $23.6-24.2m. 

License sales should be up 13-15% between $70.8 and $72.3m, driven by Unified Communications segment.

ASX announcement is here

At the midpoint, this gives IRI an EPS of 13.9c (just shy of my 14c estimate). Will wait for detail in the full results report, but happy to keep my valuation unchanged for now.

Integrated reserach has disclosed its largest ever deal; a 5-year US10m renewal and extension contract with long-standing customer JP Morgan Chase (a client of over 25 years).

For context, IRI reported ~US$35m in revenue for the half just ended. 

It's only a single data point, but a sign of IRI's defensive revenue stream and the continued relevance/importance of its offering.

Announcement here

A good result.

Revenue grew 11% and cracked $100m for the first time. NPAT increased 14% to $21.9m (a heck of a margin, which is up slightly on last year).

A weaker AUD helped, but in constant currency the profit was still 12% stronger.

The company remains debt free with $9.3m cash on hand.

The dividend was increased by 11.5%.

You can read the company announcement for more detail, but it's all quite positive save for a dip in the UC segment.

15/5/2019

Integrated Research has appointed Mr Ruthvan as the new CEO. He will formerly start in early July.

He was previously the Operating Officer of Global Sales at Technology One (ASX:TNE) (He worked there for < 2 years) and prior to that the MD of SAP in Australia & New Zealand.

Integrated Research also revealed that the 3rd quarter showed a "strong uplift" compared to the previous corresponding period, with three >$1m deals secured during the period.

Full announcement is here

Very strong business with a 30 year pedigree. It is the global leader in performance management software

• AUD$7m in cash, zero debt.
• 95% recurring revenue
• High retention
• Double digit earnings growth over an extended period, with continued strong outlook
• Big R&D investment -- >20% of revenues -- ensuring it remains best in breed and bringing new products to market. 
• Most sales earned offshore (benefits from falling AUD, and little exposure to domestic economy)
• Well diversified across geographies, industries and clients
• Net margins of >20%, having steadily increased over the past decade
• Share count has been flat for the past decade -- growth has been extremely capital efficient.
• Pays a reliable fully franked dvidend
• Dominant market position

Lots to like

Results came out towards the upper end of last year's revised guidance, with Net profit up 1% to $11.8m. This was on a 6% lift in revenue to $53.2m and a 7% rise in license sales. With 95% of revenues sourced offshore, a weaker AUD was very helpful.. 

The groups largest segment, Unified Communications returned to growth with revenue up 10%, and the outlook for the full year is positive.

Payments revenue (which represents about 1/7th of the total) was down 14% after a very strong prior period, but remains roughly double that of 2018's half and management said there were clear signs the revenue stream is growing.

The Asia Pacific region did especilly well with 62% growth, and CEO John Ruthven said he expected "a strong result for the full year based on the quality of the second half pipeline".

Cashflow from operations grew 28%, and net margins remain steady at an impressive 22%. The company remains debt free and has $7.6m in cash.

This is a company with a long history of delivering steady and profitable growth, it has a strong market position and very sticky customers. Not many company can maintain net profit margins >20% without enjoying some pretty major competitive advantages.

While they hit some operational snags a couple years back, there's nothing structurally wrong with this business in my view.

Results presentation here

Profit guidance announcement Here

Integrated Research expects revenue to be flat for FY18, with profit growth of 1-5%, citing a cyclical downturn in infrastructure and underperforming European operations.

After such a solid first half – where revenues and profits were up 5% and 20%, respectively -- it suggests a much weaker than hoped second half. The market’s reaction has been brutal, sending shares down over 24% lower, a good 40% below the 12-month high.

It’s disappointing, but I don’t think the quality of the business has changed, nor it’s longer-term growth potential. Indeed, we should remember that this kind of thing has happened to Integrated Research before.

Earnings dropped lower in both 2013 and 2014, and yet have still averaged 13% growth over the past decade. Growth tends to be step-like.

As replacement/upgrade cycles come and go, and customers deal with their own budget and strategic considerations, contract wins can easily fall into later than expected reporting periods. Additionally, investments in sales and systems take time to bear fruit, and can dampen margins in the short term.

Sales movements are further exaggerated at the bottom line due to the inherent operating leverage in the business. With a relatively fixed and scalable fixed cost base, at around two thirds of sales, it takes only a 3% move in sales to affect a 10% change in net profits, roughly speaking.

So sales can be tough to forecast in any given reporting period, and earnings even harder. Which is probably why – appropriately -- management don’t issue profit guidance with results. It’s maybe also why the market has historically found it tough to value shares (the PE has ranged between 8 and 25 since 2011).

However, given a solid industry tailwind, upsell opportunities to existing customers, significant ongoing R&D and product development, as well as positive operating leverage (ie growing net margins) – I believe Integrated Research will deliver significantly higher earnings in the years ahead. And, as an adder kicker, a weaker Aussie dollar may help (95% of earnings come from offshore). 

Importantly, as growth resumes shares will again attract a much more optimistic market multiple.

It’s possible, perhaps likely, that shares will continue to wallow for some time yet. There's no formula for picking the bottom! But with 87% recurring revenues, no debt and >$9m cash, IRI is extremely well placed to weather any sales dip, and continues to have a bright future.

Integrated Research has posted another record revenue result for half-year 2019. 

For the the 6 months through to 31 Dec, the business posted a 10% rise in revenue to $50.3m with net profit coming in 26% higher at $11.7m (both in Australian dollars). This is at the very top of recent guidance.

With 95% of revenues sourced offshore, a weaker Aussie dollar certainly helped boost the result. On a constant currency basis, revenue was 5% higher and NPAT was up 15%.

European operations, which were previously struggling, seemed to have turned the corner, with revenue in the region growing 14%.

Unified Communications -- the largest segment -- did however see a modest decline, with revenue down 3%, although management said the full year outlook was still positive.

Margins improved, cash flow was strong, sales pipeline is increasing. Still debt free with cash of $9.6m.

See ASX announcement here

Integrated Research has issued profit guidance for the 6 months ending December 31.

Revenue is expected to be between 4-6% higher at $52.5m- $53.5m.

Net Profit is expected to be flat, coming in between $11.5m to $12m, compared with $11.7m in the prior corresponding half.

At the AGM last year, IRI only said that it's sales pipeline "supports FY20 revenue and profit growth over the prior year"

Last year, first half revenue grew 10% with a 26% lift in NPAT.

ASX announcement here

Integrated Research is in the process of finalising its FY19 results and has provided the following guidance to the market.

A record sales result of $100-$101.5 million, which is growth of 10-12%

Record net profit of between $21.2-$22 million, which is growth of 10-15%

License sales were up between 17-20%.

At the time of writing, shares were down ~10%. So it seems the market was disappointed. There was no specific guidance issued by the company previously, but according to the consensus analyst forecast on CommSec, EPS was expected to come in at 13c for FY19. On teh guidance given, it looks like it will just miss this at 12.6cps.

At the time of writing, shares were at $3.06, which is a PE of 24. That doesnt strike me as expensive given our low rate world and double digit sales and profit growth -- especially for a company with such pedigree, strong balance sheet, dominant market position and level of profitability.

See full announcement here   

Integrated Research develops and sells "experience management solutions" for unified communications, contact centres and critical IT infrastructure. In essence, the software, Prognosis, monitors clients systems to ensure it operates efficently -- identifying issues, predicting disruption and providing prescriptive guidance so customers can effectively resolve issues.

Formed in 1988, it has over 1200 customers globally, including 125 of the Fortune 500 companies. It is the only company of its type to have certification with all major unified communications platforms.

The business has zero debt, the share count has been relatively stable over the past decade and it has around $9.6m of cash.

It has a ROE of 38% over past few years. 20% net margins.

Generates revenue from:

• sale of software licenses
• recurring maintenance
• testing solutions
• consulting services

Product Segments:

• Unified communications: 61% of revenue
• Infrastructure: 23% of revenue
• Payments: 8% of revenue
• Consulting 8% of revenue

87% of revenue is recurring in nature. 95% of revenue is earned offshore, predominately in the Americas.

Dividends steady at 6.5 cps pver past couple of years. Now at 55% payout ratio.

At the most recent half, revenue was up 8% in constant currency, and NPAt up 25%

Shares on issue = 171.681m

Stephen John Killelea (Chairman & founder) holds around 68m shares (39% of company), and has been selling down "to focus on his philanthropic work"

Spends 16% of revenue on R&D (capitalised and depreciated over 3 years)