Integrated Research Ltd - New Integrations: Aims to Regain Momentum in ‘23
Integrated Research Ltd
New integrations: aims to regain momentum in ‘23
Integrated Research Ltd (ASX:IRI) is a software company providing performance management and analytics for business-critical systems globally. It has three product lines: (1) ‘Collaborate’ for unified communications, collaboration and contact centre environments; (2) ‘Transact’ for payment transactions; and (3) ‘Infrastructure’ for IT network infrastructure. IRI’s ~600 clients include >25% of the Fortune 500 and many are long-standing (>15 years). Historically, IRI’s communications products served ‘on- premises’ environments (e.g. supporting Cisco, Avaya and Skype systems), while its payments services focused on bank and payments processor infrastructure as well as transactions data and analytics for card payments. Since FY20, IRI has been in a period of strategic transition reflecting material investment in new product development to meet customer needs and capitalise upon market trends. Its new offerings encompass: (1) Cloud solutions; (2) Hybrid (on-premise/cloud) solutions (e.g. monitoring and troubleshooting for remote working environments using Microsoft Teams, Zoom); (3) Software-as-a-Service (‘SaaS’) subscriptions (to reduce on-premise product skew); and (4) Payments solutions for real-time and high-value payments (given the increased volume of cashless payments). This new product development has been ‘self-funded’ via cashflows. However, IRI’s FY22 operating and financial performance (in North America and Europe) fell below its original expectations and KPIs due to delayed or cancelled customer purchasing decisions and some internal sales execution issues in H2. It has recently appointed new key personnel in North America and Europe and “remains confident that over the longer-term, its business- critical products and solutions will return the Company to growth.”.
Business model
The majority of IRI’s revenue is generated from its Collaborate offering which serves 5.8m users (55% in FY22) with the remainder from Transact (13%), Infrastructure (21%) and professional services (11%). Geographically, FY22 revenue was derived from Americas (61%), Europe (15%), and APAC (24%). Traditionally, IRI’s software has been deployed at client premises under a private infrastructure model and, in turn, licence revenue has been recognised upfront (at commencement of ~three-four year non-cancellable contracts) leading to somewhat ‘lumpy’ reported revenue even though clients make annual licence fee payments throughout the term, while the attached maintenance fees have been recognised and paid annually. Given IRI has started to derive SaaS revenue (recognised over subscription period), it now discloses additional metrics of: (1) Pro-forma (‘underlying’) revenue which is closely aligned to cash receipts ($79.8m vs. $75.5m in FY22); and (2) Total Contract Value of ‘in year’ contract signings for new and renewal business.
Solid FY22 cashflows despite lower-than-expected revenue
IRI recently disclosed the following FY22 financial information: (1) $62.9m reported (statutory) revenue (down 20% on pcp); (2) $79.8m pro-forma revenue (down 4% on pcp) of which 85% is recurring; (3) $56.7m Total Contract Value (down 25% yoy); (4) $8.5m reported EBITDA and $24.5m pro-forma EBITDA; (5) $1.5m net profit (including $4.0m tax benefit); (6) $16.9m operating cashflows and $5.1m free cashflows (after $11.5m capitalised development spend); and (7) $12.3m net cash (no debt), up from $5.5m at 30 June 2021.
Trading at sizeable discount to Splunk and ASX All Tech Index
IRI is trading at 0.9x EV/Revenue and 5.5x EV/EBITDA for FY23f (Source: Refinitiv). Whilst it is significantly larger (US$2.7b revenue), Splunk (NASDAQ:SPLK) provides an indicative valuation yardstick given it has competing products. IRI is trading at a sizeable discount to SPLK’s forward EV/Revenue of 4.2x and EV/EBITDA of 31x. The ASX All Tech Index (XTX) provides another valuation metric – with IRI also trading at a significant discount to XTX’s 12-month mean forward EV/Revenue of 3.3x and EV/EBITDA of 17x.
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