The IT performance and diagnostic monitoring software provider Integrated Research Limited (ASX: IRI) share price was trading 3.6% lower today following the release of its excellent half year results. A market announcement in January contained the key details of the results which may explain today's muted market response. Also, Integrated Research (IR) trades on a hefty historical price-to-earnings ratio (PER) of 27.4 so the good news may already be priced in.
Another possible reason for the unenthusiastic market response is the news accompanying today's results that Mr Darc Rasmussen has resigned as CEO and managing director for personal reasons. He led the company for three and a half years and former executive chairman of SAI Mr Andrew Dutton will step in as interim CEO.
Here are the key aspects of the report.
- Revenue up 10.1% to $43.3 million
- Record net profit after tax (NPAT) of $7.7 million up 24.6%
- 70% franked interim dividend of 3 cents per share
- Earnings-per-share (EPS) up 24.1% to 4.5 cents
- $9.5 million in cash and no debt
In January distributor of IR products Avaya filed for Chapter 11 bankruptcy. This process allows for the continuation of contracts with vendors but IR prudently booked an undisclosed doubtful debt charge during the period. IR is the only vendor to be certified by Cisco, Avaya and Microsoft so is well covered if customers choose not to buy technology off Avaya.
All four of IR's product ranges of Unified Communications, Infrastructure, Payments and Consulting delivered revenue growth in the period. Unified Communications is the largest segment making up 54.4% of total revenue followed by Infrastructure which accounts for 28.6%. Unified Communications has been the key driver of group performance over recent years recording an eight-year revenue compound annualised growth rate (CAGR) of 23%.
Similarly, revenue was up in all three geographical regions of the Americas, Europe and Asia Pacific in local currencies. 67.4% of total revenue is derived from the Americas followed by 19% from Europe with the remainder from Asia Pacific.
Revenue growth was stronger than the 10% reported in the headline numbers on a constant currency basis at 17% with the weakening of the British pound following Brexit impacting statutory results. NPAT would have been up 33% on a constant currency basis compared to 25% as per the statutory numbers.
The company expensed $1 million more R&D than what it spent during the period as amortisation exceeded capitalised development cost. This helps to explain the very strong free cash flow generated of $6.7 million despite the company paying out $4.9 million in tax.
A great business
IR has been growing its proportion of recurring revenue over recent years. 81% of revenue is now recurring up from 77% in financial year 2016 and maintenance renewal rates are 95%. Therefore, the company has an increasingly strong revenue base from which to grow.
In addition, thanks to very low variable costs typical of software companies, IR's profit margins are improving. The company's NPAT margin was 18% in the first half of 2017 up from 16% in the prior period.
Capital requirements outside of software development are low and so when combined with growing revenue and improving margins the result is exceptional returns-on-equity (ROE). IR's ROE is around 36% on an annualised basis despite cash held equivalent to 22% of net assets.
IR boast more than 120 Fortune 500 customers, over 1,200 customers globally and its core product Prognosis is the only Microsoft Skype for Business Online certified solution. Cisco has chosen IR Prognosis to be included with every user licence rolled out under a contract it has with the US government to deliver cloud solutions to 7 million users. Rollout began in January 2017.
Therefore, it looks like IR's strong performance is set to continue despite the resignation of its CEO today. When you also consider that today's impressive results were hampered by currency moves and a key distributor filing for bankruptcy, I think IR is good value at a PER of 27. IR is an excellent company occupying an attractive niche and I would be sorely tempted to buy shares were it not for the fact I am currently fully invested.
