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

Decent Growth in Licence Sale: Integrated Research Limited (ASX: IRI) is engaged in the design, development, and sale of systems and applications management computer software. Some of its offerings include performance monitoring, diagnostics and management software solutions, which are extended to customers across 60 countries. These services are offered to a large customer base comprising stock exchanges, telecommunication carriers, credit card companies, technology companies, etc. Revenue of the business is sourced from licence fees, revenue from maintenance contracts, and revenue from testing solutions and professional services. The company has also introduced cloud-based offerings on its platform, extending the offerings to Software as a Service (SaaS). During the year ended 30^th June 2019, revenue amounted to $100.8 million, representing an increase of 11% on the previous year. Licence fee for the period came in at $62.8 million, up 19% on the prior corresponding period. During the year, the performance was backed by strong licence sale growth across the Payments and Infrastructure product segments, supported by a rise in the number of customers and increased sales to existing customers. Growth was also supported by efficient cost management, which led to a slower rate of growth in operating costs as compared to revenue. Total expenses for the period came in at $73.2 million, up 9% on the prior corresponding year. The company spent an amount of $17.89 million on research and development, which represented 19% of the total revenue for the period.

Overall, the business proved to be a success in FY19 in a challenging and evolving industry, by crossing the milestone of $100 million revenue and $20 million profit for the first time. The company owns a diversified geographic and product portfolio that plays a major role in defining its performance. Through its unique software solutions, the company has been able to build long-term relationships with customers, which is another important factor defining its success. Moreover, the company is continuously working on enhancing its current capabilities through investment in innovation, research and development. As a result, the company is looking forward to expanding the opportunities with respect to serving the existing customers as well as attracting new users on the platform. 

As mentioned in the above section, an uptick in FY19 revenue was a result of growth achieved in licence sale. Notably, licence sale has been a key contributor to growth during FY15 – FY19. Over that period, the company has reported a CAGR of 15.3% in licence sales. Coming to the profit performance, over the period covering FY10 – FY19, the company has seen an impressive growth trajectory that is attributable to its continuous efforts on enhancing the offerings based on customer needs. The company has an international customer base sticking to it for years, which is a clear reflection of victory. To retain its customer base and maintain long-term satisfaction among the users, the company has been continuously engaged in innovation and research and has invested heavily to support its development goals.


5 Year Licence Sales Revenue (Source: Company Reports)

 
 

Growth in NPAT (Source: Company Reports)
 
Financial Highlights: Revenue for the year ended 30^th June 2019 crossed the $100 million milestone, rising by 11% to $100.8 million. EBITDA for the year came in at $40.2 million, increasing 10% in comparison to the previous year. Net profit after tax stood at $21.9 million, representing growth of 14% on the previous year. The company returned a decent amount to its shareholders, in the form of a fully franked dividend amounting to 7.25 cents per share, as compared to 6.5 cents per share paid in the previous year.


Returns to Shareholders (Source: Company Reports)

Geographic Revenue Analysis: In the Americas, the company reported strong growth in revenue despite the disturbance due to changes in leadership. In Europe, the company reported licence sale growth across both the Unified Communications and Payments segments, achieving an upside of 19% in revenue. Revenue in the Asia Pacific region increased by 14%, as a result of growth across the Payments and Infrastructure product lines.

Product-Wise Revenue Analysis: During the year, the company reported strong growth in licence sale across the Payment and Infrastructure product lines. Revenue from the payments segment stood at $16.05 million, representing an increase of 92% on prior corresponding year revenue of $8.37 million. This was a reflection of new customer wins for the period as the company added 9 new payment customers on the platform and reported increased business with the existing customers as well. The Infrastructure segment reported revenue amounting to $26.34 million, representing an increase of 28% on prior corresponding period revenue of $20.57 million. Unified Communications revenue went down by 7% on the previous year due to a decline in Avaya and Microsoft sale. Professional services revenue for the period remained in line with the previous year at $7.39 million.


Product-Wise Revenue (Source: Company Reports)

With the continued success of its product portfolio, the company is now investing on expanding its offerings to develop a new cloud-based platform for its enterprise customers, that will complement the current industry trends. The first delivery of these solutions is expected in the second half of FY20. The above initiative is well aligned with the company’s strategy to drive growth through the delivery of improved capabilities into existing markets and customers and developing new products to enable new market entries.
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 45.26% of the total shareholding. Killelea (Stephen John) held the maximum number of shares with a percentage holding of 38.84%, followed by Rutherford (Andrew Rhys) holding 1.79% of the shares.
 

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics: In FY19, the company had an EBITDA margin and net margin of 38.6% and 21.7%, which was higher than the industry median of 27.3% and 15.1%, respectively. This indicates a better profitability position in comparison to the broader industry. Current ratio of the company stood at 1.77x, higher than the prior corresponding period ratio of 1.53x, representing improved short-term liquidity. During FY17 – FY19, the company has remained debt free, indicating strong financial stability of the business.


Key Metrics (Source: Thomson Reuters)

1HFY20 Guidance and Outlook: For the six months ended 31^st December 2019, the company expects to report revenue in the range of $52.5 million - $53.5 million, which reflects growth in the range of 4% - 6% on the prior corresponding period. Licence sales for the period are expected in the range of $32.5 million - $33.5 million, that will result in a growth range of 4% - 7% over the prior corresponding half, primarily on the back of strong results across the Unified Communications product-line along with continued growth in the Asia-Pacific. Profit after tax for the period is expected to be between $11.5 million and $12.0 million, against the prior corresponding period profit of $11.7 million. The company also notified that it has chosen not to extend the Cisco HCS-G (FedRAMP) initial licence term and assured that the decision would not have a material impact on revenues or its partnership with Cisco. The company strengthened its confidence in future performance by noting the FY20 trading update, released to the market on 20^th November 2019. The company has large contracts in place that will be key catalysts for future growth. As per the update, the company had closed four large contracts valuing over $1 million on a YTD basis and had added 11 new logos on its platform. Moreover, the company is continuously focused on delivering long-term growth and has invested in increasing the number of development staff in the organisation.
 

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodologies:

Method 1: P/CF Based Valuation

P/CF Based Valuation (Source: Thomson Reuters) 
 
Method 2: EV/EBITDA Based Valuation 

EV/EBITDA Based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of the company generated positive returns of 12.69% over a period of 6 months. In the past one year, the stock has delivered returns of 10.98%. Currently, the stock is trading slightly above the average of its 52-weeks trading range of $2.210 - $3.500. For 1HFY20, the company is expecting a decent rise in its licence revenue and group revenue, on the back of improved business capabilities. The company ended FY19 with a strong balance sheet position, supported by total cash amounting to $9.3 million and zero debt at the end of the period. The company increased the amount spent on research and development and simultaneously paid a dividend amounting to 7.25 cents per share, more than the dividend paid in FY18. We have valued the stock using two relative valuation methods, i.e., Price to Cash Flow and EV/EBITDA multiples. For the purpose, we have taken the peer group - Gentrack Group Ltd (ASX: GTK), Citadel Group Ltd (ASX: CGL), Vista Group International Ltd (ASX: VGL), etc. As a result, we have arrived at a target price offering an upside of lower double-digit (in % terms). Hence, we give a “Buy” recommendation on the stock at the current market price of $2.960, up 1.024% on 14^th February 2020.
 
 
 
IRI Daily Technical Chart (Source: Thomson Reuters)

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