IRESS shares up 13 percent as transformation strategy deliver higher earnings

About IRESS Limited

IRESS Limited (ASX:IRE, IRESS or the Group) is a technology business providing software to the financial services industry. Services include trading and market data, financial advice, investment management, mortgages, superannuation, life pensions and data intelligence. IRESS’s software is used by more than 9,000 businesses and 500,000 users globally, and the Group employs over 2,000 people across Asia-Pacific, North America, Africa, the UK and Europe.

Transformation strategy on track under refreshed leadership

The appointment of new managing director Marcus Price in October 2022 is proving positive for IRESS shareholders, delivering early benefits towards the widely recognised software industry benchmark, ‘Rule of 40’. This benchmark is used by mature software service providers like IRESS to assess profitability in terms of a trade-off against revenue growth. High revenue growth at the expense of low profitability margin is seen as a negative outcome for a mature software business, although is considered acceptable and normal for a software ‘start-up’. On the other hand, high profitability at the expense of low or zero revenue growth is also considered by investors to be a negative outcome for a mature, well established software business, like IRESS. Ideally a balance between revenue growth percentage and profit margin percentage that adds up to 40 percent reflects a healthy and successful software business. This financial objective is at the heart of IRESS’s transformation strategy.

In the earnings guidance and strategy update released today, it was announced that IRESS Group is on track towards operating at Rule of 40 by FY2025. Tracking towards operating at the Rule of 40 benchmark is positive for IRESS shareholders because it implies consistent future revenue growth and steadily increasing earnings, pathing the way for a return to paying dividends to shareholders..

Earnings Guidance Upgrade

IRESS has announced revenue growth of 2.6 percent in the current half-year compared to revenue growth in the previous corresponding half. At the same time, lower staff costs have meant that earnings guidance has been upgraded out to FY2025. FY2023 and FY2024 Underlying EBITDA have been revised upwards by 8.5 percent and 6.6 percent to $130 million and $140 million respectively. This favourable trend is set to continue with the FY2024 exit run rate guided to a range between $150 million and $170 million.

Capital Management Plan

The Group has stated its intention to share its capital management plan with shareholders in February 2024. While no details were provided as to what may be included in the plan, management has stated that there is no requirement to raise equity capital in the medium term and the Group’s debt is comfortably within bank covenant limits. Net debt at 31 October is $208 million, down from $375 million at 30 June and the Group’s debt ratio is a comfortable 2.3x, measured as net debt / EBITDA. Net debt is forecast to decline further as more assets are divested in 2024.

Clearly the transformation strategy is working, and these financial metrics imply that IRESS is well placed to re-instate the payment of shareholder dividends soon. Steadily increasing profits at satisfactory profit margins and based on steadily growing revenue implies positive shareholder returns into the foreseeable future, including a higher share price.