Integrated Research Limited

Company Overview: Integrated Research Limited (ASX: IRI) is a provider of varied software solutions such as collecting, and storing data, performance tracking, event automation, helpdesk applications, event automation, resource management and job scheduling.

IRI Details

New Product Launches & Growth Strategies: IRI remains on track to turnaround its 1HFY21 performance, amidst the turbulent global environment. The requirement of the company’s cloud-based solutions to enterprise customers has become more relevant. It expects the structural changes in market dynamics to positively aid its operational and financial fundamentals, going forward. The company remains on track to invest higher in R&D to accelerate innovation and expand its value proposition for customers worldwide.

• Launches New Solution: In 1HFY21, the company unveiled new cloud-based solutions for Microsoft Teams and Zoom, thus expanding its Collaborate product line. Notably, for 2QFY21, the company targets more than 5k employees in enterprises using MS Teams Service Providers to manage MS Teams for their customers.
• Signing of Contracts: In 1HFY21, the company signed a US$1.4 million contract for Payment Analytics, which is part of the Transact product line. IRI also added 16 new customers in 1HFY21. The most noteworthy add-on was with FedEx who bought Collaborate for their Cisco environment.
• Customer Growth: The company remains on track to protect existing customer environments, cross-sell new hybrid cloud solutions, enhance Cloud New Teams, Zoom & Webex products and expand into new SaaS platforms. The company expects more than 100 renewal & capacity deals along with the addition of more than 40 new customers in 2HFY21.

Ongoing investment in product innovation to capitalise on new market opportunities were key growth drivers. The company’s new SaaS products gained traction, with key contract wins with ACI and BT. The below picture depicts a continuous growth trajectory in the company’s top-line since FY16.

Revenue Trend; Analysis by Kalkine Group

Key Findings from 1HFY21 Results:

• In 1HFY21, the company reported a profit after tax of $129,000 and revenue of $34.1 million.
• Cash receipts from customers during the period came in at $42.4 million, depicting a decent conversion of receivables and no substantial doubtful debt exposures in 1HFY21.
• The company added 16 new customers, including FedEx, during 1HFY21.
• IRI reduced its total expenditure to $32.9 million in 1HFY21, down by 15% from the prior corresponding period.
• The company introduced new cloud solutions for Zoom and Microsoft Teams and expanded its Collaborate product line.
• IRI paid a fully franked final dividend of 3.75 cents per share in October 2020. The company did not declare a dividend for 1HFY21 and will assess future dividend payments after the availability of FY21 results. 

Balance Sheet and Liquidity Position: 

• Cash & Debt Position: The company exited 1HFY21 with a cash balance of $8.2 million. Total debt amounted to ~$13.7 million at the end of the period. In addition, net cash as at 30 June 2021 stood at $5.5 million, up from $4.7 million reported at the end of 30 June 2020.
• Operating Cash Inflow: During 1HFY21, the company generated an operating cash inflow amounting to $11.3 million, as compared to an operating cash inflow of $13.2 million reported in the year-ago period.

Key Metrics: For 1HFY21, the company reported a gross margin of 13%, lower than the industry median figure of 30.7%. The current ratio of the company for the same time span stood at 1.89x, higher than the 1HFY20 figure of 1.61x. The debt-to-equity ratio for the period stood at 0.18x.

Liquidity and Leverage Profile; Analysis by Kalkine Group  

 Key updates:

• On 30 June 2021, the company announced that Matt Glasner, Chief Commercial Officer of the company has departed from the company, subsequent to a restructuring of IRI’s executive leadership structure.

• On 13 May 2021, IRI informed the market that it has appointed Mr. James Scott as the company’s Non-Executive Independent Director, effective from 13th May 2021.

Top 10 Shareholders: The top 10 shareholders together form around 36.66% of the total shareholdings, while the top 4 constitutes the maximum holding. Killelea (Stephen John) is the entity holding maximum shares in the company at 30.13%. Rutherford (Andrew Rhys) is the second-largest shareholder, with a holding of 1.62%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:

• Consumer Preferences: The company’s financial performance might get impacted by deal deferrals and caution in buying behaviour.
• COVID-19 Led Uncertainties: The company is exposed to the prevailing global uncertainties related to COVID-19 and other geopolitical tensions with the lengthening of typical sales cycles and deferred purchases by customers.
• Stiff Competition: The company operates in a highly competitive environment, which is subject to ongoing significant changes, including business consolidations, new strategic alliances, market pressures, and regulatory and legislative pressures.
• The company is exposed to foreign currency fluctuation risks. 

Outlook: IRI aims to seek traction from new cloud solutions, which are recently introduced to bolster the platform growth in the future. The company plans to introduce real-time payment monitoring in Q4FY21 targeting banks as its key audience. IRI has also added new customers, which includes support for the Microsoft Teams and Zoom environments. The company unveiled a new solution for Webex in June 2021 and expects to expand its product line – Collaborate and customer base in FY22.

• For FY21, the company expects revenue to be in the range of $74.1 million to $79.1 million and annual profit after tax to be between $4.1 million to $7.1 million.
• The company is estimating to achieve revenue between $40 million to $45 million in H2FY21. Reported profit after tax for 2HFY21 is expected to be in the ambit of $4.0 million to $7.0 million. Driven by the recent acceleration in sales, the company is optimistic with H2FY21 performance relative to H1FY21.
• Further, IRI’s license fee revenue recognised to date in 2HFY21 has outperformed the revenue in H1FY21. Besides, the company highlighted that the launch of new products to drive growth. 

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of IRI gave a return of ~-18.49% in the last three months. The stock is trading lower than the average of the 52-week high and low levels of $4.920 and $1.74, respectively, which indicates a good opportunity for accumulation. IR expects to report FY21 annual results on 19 August 2021. We have applied an EV/Sales-based relative valuation (on an illustrative basis) and the target price reflects a rise of low double-digit (in % terms). We have applied a slight premium to EV/Sales Multiple (NTM) (Peer Average), considering its new product launches, contract wins, decent 2HFY21 outlook, and robust customer additions. For relative valuation, Janison Education Group Ltd (ASX: JAN), TechnologyOne Ltd (ASX: TNE), to name a few.Considering a decent portfolio of contracts, decent cash flow from operations, current trading level, valuation and key risks associated with the business (as stated above), we recommend a “Speculative Buy” rating on the stock at the current market price of $2.13, up by ~8.673% as of 16 July 2021. 

IRI Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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