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:
On the downside:
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.
Continuous Disclosure – Half Year ending 31 December 2020 - Update
The Company is in the early stages of preparing its interim financial statements for the six months ending 31 December 2020. Based on internal management accounts and subject to audit review, the Company anticipates both revenue and profit after tax to be at the lower end of the guidance previously provided. The AUD/USD exchange rate strengthened by another cent on the last day of the year resulting in further unrealised exchange losses. The Company’s cash balance (net of debt) at 31 December was $1.7 million (30 June 2020: $4.7 million). Despite the shortfall in revenue, cash receipts from customers for the period again exceeded $40 million. There were no material doubtful debt exposures arising during the period.
Disc: previously held
The trend in the Unified Communication industry is to move to Cloud. Microsoft is discontinuing Skype for Business and migrating all the user base to Microsoft Teams. What IR was providing to the customer is now inbuilt into Microsoft Teams offering. Similarly, CISCO has its own cloud offering. I expect 90% of customers will be moved to Cloud for UC solution by 2025 and at that point in time, IR doesn't provide any benefit to end customers - Customers will not opt-in for IR services once they migrate to Cloud. I expect this company to go to 0 by 2030.
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.
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.
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.
I don't currently hold IRI but I have in the past and they are certainly on my "to buy" watchlist - on a decent pullback. They have been sold down today on these numbers - currently they're down by around -14%, so the market seems underwhelmed by this result and was clearly expecting more. However this is a quality company with some massive customers and I'm still looking to buy if the SP gets down to $3 to $3.50 again - which is where they were trading for most of FY20 - up until June 2020 - they have looked overpriced up above $4.50, and they got down to $2.34 in March, so they more than doubled from there to their $4.90 close yesterday, obviously rallying hard into this result today. Back in March however, we were spoiled for choice - with so many quality names available at bargain prices as so many investors cashed out of all assets, so everything fell, and I was focussed elsewhere at the time - on other sectors.
Anyway today's drop is a welcome start, but I'd like to see them drop a lot more to give me a better entry price.
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.
Maintaining strong growth guidance for the rest of FY20
The market has opened well, with shares up 4.5% at time of writing.
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.
Very strong business with a 30 year pedigree. It is the global leader in performance management software
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
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