Integrated Research Limited (IRI) is a virtually unknown – by investors, that is – Australian tech success story. IRI is a software company that develops and supplies performance monitoring, diagnostics and reporting software for business-critical computing and Unified Communication (UC) networks.
IRI serves customers in more than 50 countries through direct sales offices in the USA, UK, Germany, Australia, and via a global, channel-driven distribution network.
The flagship product, Prognosis, is an integrated suite of monitoring and management software, designed to manage systems that simply cannot go down – in IT jargon, they are “continuity-critical.”
For example, Prognosis ties in with HP’s market-leading NonStop system management software, which makes sure that a network is up all the time. It runs in large HP mainframes that run the big applications – ATMs, internet banking, airline reservation systems, stock trading systems – that cannot be allowed to go down. The software is embedded in the network and gives the operator advanced warning if the system might crash.
In normal networks, it doesn’t matter if the network is down for a few minutes. But with a stock trading system or a telephone network you can’t afford it. IRI’s integrated software gives these customers advanced warning of the possibility of the network going down – in layman’s terms it is trouble-shooting software. Supplying Prognosis into these systems is the bulk of what IRI does.
Prognosis users include banks, insurers, credit card companies, stock exchanges, airlines, energy providers, data centres, governments, hospitals, manufacturers, universities, call centres, managed service providers, and technology companies. IRI says its customer base includes:
• eight of the world’s ten largest companies;
• five of the top ten US banks;
• six of the world’s top ten telcos;
• three of the world’s biggest oil and gas companies; and
• six of the world’s ten largest stock exchanges.
In 2011-12, IRI lifted revenue by 9% to $48.6 million, and net profit by 21% to $9 million. Given that more than 95% of IRI’s revenue is earned outside Australia, this was a solid effort considering the A$ rose by 4% against the greenback over the year.
Highlights of FY12 included expanding the VoIP (voice over Internet protocol) product range into the UC management capability, which doubled IRI’s potential market. Also, the company was able to boost the number of supported platforms to include Microsoft’s Lync and Lync for Mac enterprise software, which resulted in IRI’s largest-ever single sale.
IRI lifted its full-year dividend by one cent, or 25%, to five cents a share, franked to 58%.
However, in January 2013, IRI brought out a profit downgrade, saying net profit for the half-year would be in the range of $2.5 million–$2.9 million, compared to $3.56 million in the December 2011 half. While IRI’s interim net profit did come out at $2.8 million, near the top end of this range, that figure represented a 23% decline on the December 2011 half profit.
Revenue fell by 3% to $21.5 million, dragged down by a 13% fall in licence sales – which account for half the company’s revenue – while maintenance revenue (40% of sales) was up 4%, and consulting revenue (10% of the total) rose by 37%. The interim dividend was 2 cents a share, franked to 30%.
The company conceded that the December 2012 half was “disappointing,” but said it “anticipates a strong second half to enable growth over the prior financial year.”
Importantly, IRI had net cash of $11.1 million on the balance sheet at the half-year. This is only marginally down on the net cash figure of $11.6 million that it had three years ago – the company is ploughing back 21% of revenue into R&D. IRI’s margins are nice and juicy, at 19% (profit after tax to revenue).
Prognosis is positioned nicely for the growth in the UC market, which incorporates multiple methods of communication, including voice, video and messaging. This growth is driven by the continuing rise in IP (internet protocol) end-points – a factor accelerated by the entry of Microsoft Lync into the market – and the shift from VOIP to UC in the enterprise telephony market.
This shift looks to have plenty of legs. IT and telecommunications research firm Gartner estimates that there will be 250 million UC end-points by 2017: each of these requires multiple UC applications to be managed. Which provides a considerable market opportunity for IRI.
IRI has been a strong performer over the last five years, moving from $38 cents to $1.05, while paying 19 cents in dividends. But over the last 12 months it has not been that impressive, moving from 86.5 cents a year ago to a peak of $1.54 in January, but falling sharply on the profit downgrade, to as low as 97 cents in early April. From there the share price has recovered slightly, to $1.045.
In the absence of a consensus estimate from analysts, we have to work with historical figures. These have IRI trading on 19.3 times FY12 earnings, and a dividend yield of 4.78%. At these levels IRI – given its position in the global market – looks worth a punt on the company delivering the stronger second half it has predicted.
