Yesterday I finally closed off my position in IR, being a shareholder for a while.

My initial investment thesis was that IR was a stable, reliable company with stable earnings growth expecting to grow at a high single digit multiple for the foreseeable future (10 year timeline).

Part of this thesis was my understanding of what IR served its clients with. A 'mission-critical' software & payments platform that helps identify software problems.

IR got hit hard by COVID and followed with 2 profit downgrades and NP to come in marginally above $0. For a company who's software is 'mission-critical' how were businesses able to cut this software out of their systems during a period of financial hardship....?

On the back of the share price rally yesterday [Due to upgraded guidance] and the absolute stretch of a valuation, I decided to sell my holdings.

See @Strawman's valuation for an understanding, but I believe the business model is under attack by new technologies and management face an uphill battle to grow earnings. The valuation has them priced in to achieve this also. 

The balance sheet, debt & liquidity of the firm

·         As of the JH20, here are some balance sheet highlights

o   Cash reserves at 9.74m, up from 9.3m on pcp reflection

o   Trade receivables climbed 19% to 87.25m as there has been a large portion of deferred payments from clients due to COVID19 related issues.

§  In saying this, IR has had little to no issues with bad debts in the past

o   Debt in the form of borrowings at 5m (note the following excerpt.)

Note – debt to be paid off by 2023 JH

The debt was taken out as a COVID19 related precaution, no debt was existing prior to this.

·         IR has a strong history of little to zero debt at all (no debt in last 6 FY’s)

·         In terms of liquidity both current & interest coverage ratios are healthy

Understanding the power of the business model, economic moats and tech dominance.

·         The power of the Software as a service (Saas) business model has come to light recently, particularly in cases where a business is super scale able, as is with IRI

·         Once a customer has integrated IRI’s technology into their management systems, they tend to be very sticky. This is because it is extremely costly and time-consuming for the business to then integrate an alternate software and train staff to use it

·         This is reflected as “close to 90%’s of IRI’s revenues are sticky” – multiyear contracts etc.

·         This stickiness allows IRI to slowly rise their prices YoY without clients deciding to run for the hills

·         Thus in the long run, operating leverage is a powerful tool for management as they can begin to make more money from existing clients from a similar cost base

·         IR’s customers include many large firms such as banks, retails etc which means the chances of a client packing it up with IRI and shifting to a competitor is unlikely for the reasons explained above

·         Past performance of the multi year (5+) contract strategy has been strong and there is no reason to think this will change.

Profit guidance

Maintaining strong growth guidance for the rest of FY20

The market has opened well, with shares up 4.5% at time of writing.