Each week The Motley Fool highlights a company on its radar. This week we look at a tech-wreck survivor that has embraced IP Telephony. Rather than be scared of the stock market's volatility, we prefer to embrace the cheap share prices it offers fearless, long-term investors.
You won't find Integrated Research (ASX: IRI) on many people's share market radar. Despite a bargain basement price and a mouth-watering yield this small cap software company continues to fly below the radar.
What's the prognosis?
In the business world, one company's problem is often another company's opportunity. While dwindling fixed line subscribers is a problem for Telstra (ASX: TLS), it is a massive opportunity for Integrated Research.
People aren't reducing the number of phone calls they make. They're simply making the calls on other networks – wireless and internet networks.
Internet protocol telephony networks – IPT or VoIP as it is commonly referred to – are fast becoming mainstream. An increasing number of Australian and global telecommunication users are hanging up on fixed line services and embracing VoIP.
One small Australian business stands to profit from this VoIP tidal wave.
Integrated Research is a global provider of performance monitoring and diagnostics software for business-critical computing and VoIP networks. Its flagship product is PROGNOSIS, an integrated suite of applications that monitors and manages distributed IT infrastructure, payments systems, communications, and Web applications.
[UPDATE: I originally said IR was re-branding itself as Prognosis. After this article was published I spoke to Integrated Research's CEO, Mark Brayan. I clearly had the wrong end of the stick on the rebranding. Mr Brayan said the company have been refocusing on the Integrated Research brand over the last few years. I think that is a sensible strategy. ]
Integrated Research has had a seat at the IP telephony table since the technology's infancy in 2000. It began by monitoring Cisco's IP systems, but now supports other key VoIP providers such as Avaya and Nortel technologies.
The transformation deal for Integrated Research came in 2009 when PROGNOSIS was selected by communications giant Avaya to replace its in-house developed VoIP monitoring tool. PROGNOSIS VoIP Monitor is now shipped with every Avaya PBX sold worldwide.
Show me the money
The Avaya deal along with global momentum in IP telephony delivered a 52% jump in VoIP revenue for the 2011 financial year. Thanks largely to VoIP sales, and by keeping a lid on expenses, Integrated Research achieved a 38% increase in profit in 2011 to $7.5 million on $45 million of sales.
The software business is brutally competitive, but the silver lining is in the high margins and maintenance. Once you've written all those zeroes and ones, they're practically free to manufacture and distribute. Integrated Research currently operates on a net margin of 17%. That's a healthy margin, but it could be even better.
Management are focused on controlling expenses – expense growth was capped at a low 6% in 2011. As increasing sales and recurring maintenance revenue hits the top line, management's focus on cost control will result in more dollars falling to the bottom line. At some point the market will sit up and pay attention to these increasing profits.
With a market capitalisation of just $62 million, Integrated Research is debt free and flush with cash – $11.6 million as of 30 June 2011. It continues to sensibly invest in research and development – the pipeline of future growth.
Management recently increased the final dividend to 2.5 cents, bringing the total 2011 dividend to 4 cents. With a stock price around 37 cents, that's a very juicy dividend yield of 11%.
Despite all this, Integrated Research trades for only around 8 times trailing earnings – the market is pricing the company as if it will never grow again. On the contrary, I think Integrated Research can thrive, as it is well positioned to ride the tidal wave of IP telephony, and increasingly complex IT and payment systems.
Foolish Bottom Line
Integrated Research's price to earnings multiple of 8 and dividend yield of 11% are an attractive value proposition. When combined with the growth catalysts of VoIP and consulting services its stock redefines the phrase 'growth at a reasonable price'. Integrated Research offers growth at a crazy low price.
Don't rush out and place a market order to buy the shares right now. Integrated Research is a small-cap company with low trading volumes and wide bid-ask spreads. If, after your own diligent research, you are interested in buying part ownership of this company, use a limit-order.
Dean Morel is The Motley Fool's Investment Analyst. Dean has no position in Integrated Research. The Motley Fool's purpose is to educate, amuse and enrich investors. Are you looking for more small-cap stock ideas? Readers can click here for a new free report titled 2 Safe Ways To Play The Commodities Boom.
