Company Overview: Integrated Research Limited is a provider of performance monitoring, diagnostics and management software solutions for business-critical computing environments. The Company's principal activities are the design, development, implementation and sale of systems and applications management computer software for business-critical computing, unified communication (UC) network and payment networks. Its geographical segments include the Americas, which operates from the United States with responsibility for the countries in North, Central and South America; Europe, which operates from the United Kingdom with responsibility for the countries in Europe; Asia Pacific, which operates from the Australia and Singapore with responsibility for the countries in the rest of the world, and Corporate Australia. It is focused on three markets: Infrastructure, which includes users of computing systems; Communications, which includes users of Internet Protocol telephony and UC applications, and Payments.


IRI Details

1HFY19 Profits on Top-End of Guidance: Integrated Research Limited (ASX: IRI) is engaged in the design, development, implementation and sale of systems and applications management computer software. There are four main business verticals, i.e., Unified Communications, Infrastructure, Payments, and Consulting, which contributed revenue around 54%, 22%, 18%, and 7%, respectively in 1HFY19. The company provides its services across more than 60 countries. During FY18, the company reported the strongest growth in the Asia Pacific with revenues rising at a rate of 14% to $13.2 million. Growth in APAC was supported by continued growth in license sales of the core Prognosis software platform. During FY18, Unified Communications license sales growth was driven by sales to Cisco customers. In January 2018, the company signed a global distribution agreement with Cisco to carry Prognosis UC products in its global price book. The company also signed a reseller agreement with Avaya in July 2018, that will allow salespeople of Avaya to attain commissions and meet their quotas on Prognosis sales.
 
Looking at the performance over the period covering FY14 to FY18, the company witnessed 14.4% top-line CAGR growth with FY14 revenue amounting to $53.2 million and FY18 revenue amounting to $91.2 million. Bottom-line CAGR growth over the same period stood at 22.6%, with FY14 and FY18 profits valued at $8.5 million and $19.20 million, respectively.
From the period starting 2014, the company’s license revenue increased continuously to 2017, with revenues amounting to $28.0 million in 2014 and $53.4 million in 2017. Total dividends paid over the period reported a mixed trend, with an upward movement till 2016, declining subsequently in 2017 and rising again in 2018. Dividend paid in 2014 and 2018 were valued at $9.28 million and $11.14 million, respectively.
 
Going forward, the company is likely to continue the strong performance with revenue growth in the range of 10% to 12%. Strong growth in the businesses accompanied by service providers, new reseller agreements with Cisco and Avaya, decent R&D expenditure for technical excellence, a diversified geographical revenue model, etc., augur well for the future growth of the company.


5-Year Performance Highlights (Source: Company Reports)

1HFY19 Highlights: During the six months ended 31 December 2018, the company reported a profit after tax amounting to $11.7 million, increasing 26% on prior corresponding period. License sales for the period were reported at $31.3 million, up 22% on prior corresponding period. During the period, the company’s total revenue was recorded at $50.3 million, up 10% on prior corresponding period. Out of the total revenue earned during the period, 95% was derived outside of Australia.

The strong growth in the first half was due to rapid growth in the Payments product line and a return to growth in Europe. Europe reported a growth of 14% on pcp owing to re-organisation of the business and large deal closure. The period was characterised by strong license growth through renewal and capacity expansion that led to Payments growth of 144%. In the first half, the company’s gross spending on development activities represented 18% of the revenue.


1HFY19 Financial Summary (Source: Company Reports)

Revenue Analysis Based on Locations: In the Americas, the company witnessed consistent growth in revenue over the period covering 1HFY13 to 1HFY19. CGR growth from the region stood at 8% over the said time period. In Europe, the company has reported CGR growth of 13%. The revenue rose substantially post 1HFY16, with growth based on strong payments. Revenue in Asia Pacific witnessed a CGR growth of 7%, with 1HFY19 revenue falling in comparison to 1HFY18 due to deal slippage in the region.


Geographical Revenue (Source: Company Reports)

Revenue Analysis Based on Products: Highest CGR growth came in from the Payments segment at 26% on the back of global contribution, strong relationship with ACI and multi-year account renewals & extension. Revenue from the infrastructure segment remained consistent with the high margin product line and sticky customer base. Unified Communications segment witnessed a growth in Cisco, which was offset by a decline in Avaya. The segment reported CGR growth of 17%.


Product Revenue (Source: Company Reports)

Key Takeaways from 1HFY19 Results:

New Line of Revenue: The company has introduced SaaS as the new line of revenue with the introduction of early cloud products such as Skype for Business On-line Troubleshooting and UC Accessor. Although the products have not contributed much to the first-half revenue, the company has sold over one million subscription bookings that will be delivered in the future and add to revenues.

Exuberant Growth in Payments Revenue: During the period, the company reported payments revenue amounting to $9.0 million, increasing 144% in comparison to the prior corresponding period. The growth came in as a factor of capacity improvement, deal renewal, and new product initiatives.

European Operations Back on Track: The company reported a good performance in Europe in the first half, owing to large deals closure. Also, the region has seen the implementation of a more strategic-go-to-market approach by the new leadership.

Cash position and Dividend: During the first half, cash flow from operations was reported at $9.6 million, up 19% on the prior corresponding period. This will help the company’s on-going investment into research and development. The company declared a fully franked interim dividend of 3.5 cents per share.

Recent Updates:

(a) Earnings Release: The company recently updated that it will release the earnings for the full year ended 30 June 2019, on 22 August 2019.

(b) Appointment of CEO: The company recently appointed John Ruthven as the Chief Executive Officer who commenced the role in July 2019. He has a rich experience of over 20 years in the technology industry with prior experience in multiple organisations including TechnologyOne, SAP, Zuora Inc, CA Technologies and Computer Associates Inc.

(c) Change in Directors’ Interest: Recently, the company has released a number of announcements regarding the change in interest of some of its directors. Garry Donald Dinnie acquired 7000 ordinary shares in the company for a total consideration of $16,940 via on-market purchase of shares. Paul James Brandling acquired 25,104 Ordinary Shares for a total consideration of $59,641.83 via on-market trade.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 44.45% of the total shareholding. Killelea (Stephen John) holds the maximum interest in the company at 39.48%, followed by Rutherford (Andrew Rhys) holding 1.79% of the shares in the company.

Top 10 Shareholders (Source: Thomson Reuters)

Key Metrics: During 1HFY19, the company had an EBITDA margin of 41.3%, which has improved in comparison to the prior corresponding period margin of 40.0% and higher than the industry median of 26.5%. Net margin for the period stood at 23.3% against the industry median of 14.7% and prior corresponding period margin of 20.3%. Current ratio for the period increased in comparison to the prior corresponding period, with 1HFY19 ratio at 1.53x and 1HFY18 ratio at 1.38x.
 

Key Metrics (Source: Thomson Reuters)

FY19 Guidance: The company recently released the estimations on its financial results for the year ended 30 June 2019. Based on the internal management accounts and subject to audit, the company’s revenue for the year is expected to be in the range of $100.0 million to $101.5 million, depicting a growth of 10% to 12% on the prior year. In addition, the company expects profit after tax for the period to witness growth between 10% to 15%, with the amount of profit lying within the guidance range of $21.2 million and $22.0 million. License sales for the year are expected to be in the range of $61.5 million and $63.0 million, that represents the strongest performance driven by the company’s Payments product line with growth in the range of 17% and 20%.
 

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodologies: 

Method 1: Price to Cash Flow Approach:

 Price to Cash Flow based Valuation (Source: Thomson Reuters)

Method 2: EV/EBITDA Multiple Approach:


EV/EBITDA Multiple Approach (Source: Thomson Reuters), NTM: Next Twelve Months 

(Note: All forecasted figures and peers have been taken from Thomson Reuters)

Stock Recommendation: The stock of the company generated returns of -20.12% and 1.95% over a period of 1 month and 3 months, respectively, and traded lower lately on release of the guidance despite depicting a decent growth story. During the first half ended 31 December 2018, the company reported record performance with profits amounting close to the top end of the guidance provided. Profits during the period increased by 26%, revenue by 10% and license sales by 22%, in comparison to pcp. The company saw a return to growth in Europe along with a remarkable growth in Payments product line, that collectively contributed to strong first-half results. Payments revenue increased substantially due to new product initiatives, deal renewal, and capacity improvement. In Europe, the company saw large deal closures contributing to growth in revenue. In addition, the company also improved on its profit margins with EBITDA margin at 42% in comparison to pcp margin of 40.0%. NPAT margin for the period stood at 23%, which was higher than NPAT margin of 20% in the prior corresponding period. The first half was also characterised by the addition of 20 new customers, pipeline growth with opening pipeline higher than pcp and an annual maintenance retention rate of 95%. The company is also expected to see an increase in future revenues from a new line of revenue, i.e., SaaS products. So far, the company has sold subscription bookings worth 1 million dollars that will be released in the future. In addition, FY19 guidance also represents a decent growth in key performance metrics.

Considering the performance in the first half, growth in revenue from Europe, increase in Payments revenue, improvement in profit margins and the expected benefits from new products introduced in the SaaS category, we have valued the stock using two relative valuation methods, Price to cash flow and Ev/EBITDA multiple and have arrived at the target price of single-digit upside (in percentage term). Hence, we recommend a “Buy” rating on the stock at the current market price of $2.710, up 3.435% on 09 August 2019.

 
IRI Daily Technical Chart (Source: Thomson Reuters)

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