Iress to report 50 percent earnings uplift to $65 M for the June 2024 half-year

About Iress Limited

Iress Limited (Iress, the Group, ASX: IRE) is a technology company that develops software for the financial services industry. Iress operates across Asia Pacific, the United Kingdom, Europe, and North America. The Group employs 1900 people, of which approximately 1000 work in Australia and the Asia Pacific region.

Fifty percent uplift in June 2024 half-year Adjusted Earnings 

Iress expects to report significantly higher earnings and improving financial metrics for the half-year reporting period to 30 June 2024.  The Group’s Adjusted EBITDA is estimated to be in the range of $65 to $67 million, up from, $44 million in the previous corresponding 6 months. The 50 percent earnings uplift flows from the Group’s ongoing transformation program which commenced in early 2023 and remains on track for completion by 31 December 2024. Under the turnaround initiatives, Iress’ core business of Wealth, and Trading & Market Data, which includes the UK Wealth business unit, has benefited from the appointment of a new Chief Executive Officer in October 2022. A disciplined cost-out program and a re-focus on core competencies have delivered on revenue targets and improved the Group’s operating leverage during the June half-year.

Return to paying maintainable dividends 

Proceeds from the divestment of Iress’ platform business in April, and Pulse portfolio management software in May, have been applied to retirement of debt. The sale of the UK Mortgages business should settle by 1 August 2024, reducing leverage to within the range of 1 to 1.5 times debt to equity. A strengthened balance sheet is expected to clear the way for Iress to return to paying shareholder dividends.

At release of the half-year results on 19 August 2024, shareholders can expect a clear statement that balances future capital requirements and sustainable shareholder dividends. Management have stated that although complete by December 2024, the transformation process will incur remaining costs in FY2025. This suggests that shareholders may not see a return to paying dividends until after the release of the full-year results to 31 December 2024. At that time the Iress Board may consider re-commencing shareholder dividends with a view to increasing the level over time as transformation led activity delivers steadily increasing profit results.

The Iress Board have recently referred to the goal of achieving the ‘Rule of 40’ when discussing shareholder dividends. This rule states that the combined value of the revenue growth rate and profit margin should exceed 40 percent for a well-managed software business. The Board’s goal is to consistently achieve this financial metric from the end of FY2025. This implies that a return to paying sustainable dividends at the high end of the Group’s payout ratio may not occur until the 2025 financial year.

Looking Ahead

Iress has a strong core business franchise built around Wealth, Trading and Market Data and Superannuation.  It provides essential infrastructure and functionality to wealth management businesses that generates high-quality, recurring revenues for the Group. Like most software businesses, Iress has a high cash conversion ratio of above 80 percent. This high cash flow to accounting profit ratio supports a high dividend payout ratio, once the Group’s leverage ratio falls to within the 1.0 to 1.5 times debt to equity.

Historically, the Iress Board have adopted a payout ratio of around 80 percent of net profit after tax. The successful execution of Iress’ turnaround strategy now almost complete and the likelihood of a resumption of dividends in 2025 should see steady shareholder value accretion at least in the medium-term.