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#H1 2020 Results
Last edited a week ago

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

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#ASX Announcement 15/1/21
Added a month ago

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

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#Bear Case
Added 2 months ago

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. 

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#Guidance change (again)
Added 2 months ago

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

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#Guidance change
Added 2 months ago

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

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#AGM update
Added 3 months ago

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

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#Balance sheet analysis
Added 5 months ago

 

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

 

 

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#Moats & business model
Added 5 months ago

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.

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#FY20 Results
Added 6 months ago

20-Aug-2020:  FY2020 Financial Year Results   and   FY2020 - Financial Results Briefing   plus   Appendix 4E & Financial Report for FY2020

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.

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