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Edited Transcript of IRI.AX earnings conference call or presentation 17-Feb-21 11:30pm GMT

·36 min read

Half Year 2021 Integrated Research Ltd Earnings Call NSW Feb 18, 2021 (Thomson StreetEvents) -- Edited Transcript of Integrated Research Ltd earnings conference call or presentation Wednesday, February 17, 2021 at 11:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * John Ruthven Integrated Research Limited - MD, CEO & Director * Peter Adams Integrated Research Limited - CFO ================================================================================ Conference Call Participants ================================================================================ * Andrew Perks Accordius Pty Ltd. - Portfolio Manager * Chris Savage Bell Potter Securities Limited, Research Division - Senior Industries Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- John Ruthven, Integrated Research Limited - MD, CEO & Director [1] -------------------------------------------------------------------------------- Good morning, and welcome to the First Half FY '21 Results Briefing for Integrated Research. My name is John Ruthven, and I am the CEO of IR. With me today is Peter Adams, our Chief Financial Officer. This morning, we posted our results presentation to the ASX website, which we will be talking to during this call. Today's presentation will be in 3 sections. First, H1 results analysis, I will provide a high-level introduction, and then Peter will follow with a detailed review. I will follow with an insight into our new product launches then close out with a review of our growth strategy and the key success drivers and finally take some of your questions. Please move to Slide 3, CEO key messages. IR is the leading global provider of performance and experience management solutions, unified communications, payments and infrastructure. We have an extensive enterprise customer base that includes over 25% of the Fortune 500 companies with a long history of creating value through our deep domain knowledge to optimize operations of mission-critical systems. We're a company transitioning across a number of fronts, face-to-face engagement to digital channels, on-premise to cloud and upfront revenue to subscription. This is in response to new and changing market dynamics in our key markets. The structural market changes of remote working and cashless payments continue to disrupt traditional markets and accelerate the shift to cloud and the decline of cash. In the first half of FY '21, we delivered new cloud products to position us for these market opportunities, including Microsoft Teams, Zoom and Payment Analytics. The first half also provided an impetus through our thinking and planning for the transition of our business model to subscription. The key aspect of this was the pro forma results and solid cash flow performance through the first half. Cash receipts from customers was down 7% whilst revenue was down 36%. The first half was challenging, with revenue well down and a near breakeven profit result. Having completed a thorough review of our sales execution, 4 deal-related factors affected the result: firstly, nonrenewals; second, reduction in deal value; third, deals deferred to a future period; and foreign exchange. I will cover this in more detail shortly. We have a new product pipeline over the next 12 to 18 months to capitalize on an addressable market opportunity of over AUD 1 billion. We will support the 3 biggest cloud collaboration platforms: Microsoft Teams, Zoom and Webex. In addition, we will expand our cards payment opportunity through integration through additional switches and into the real-time payments segment. We remain well positioned for long-term growth, benefiting from structural market changes in remote working and contactless payments by accelerating our innovation agenda in the high-growth areas of conferencing and real-time payments. As I move to Slide 4, the numbers are confronting. At the same time, they tell a clear story. The charts are naturally divided into 2 columns: the left-hand side representing revenue and profit and the right-hand side representing cash flow and cash. Revenues declined by 36% to $34.1 million driven by a shortfall in license fees that are recognized upfront. Our NPAT result came in at $129,000, just above breakeven point. The result is driven by the fall in revenue and partly shielded by a reduction in operating expenses that Peter will talk to later. We were negatively impacted by the increase in the Australian to U.S. dollar exchange rate. NPAT in constant currency would have been $2.9 million for the half. The cash flow story, shown on the right-hand side, is down but highlights the fundamental strength of our business model. Cash receipts from customers was $42.4 million, down 7%. There were no material doubtful debts. There was no debtor factoring. Operating cash flow was $11.3 million, a stark comparison to the near breakeven result. As a result, the company remains in a positive net cash position. Moving to Slide 5, I want to address the deal movement we experienced late in the first half. At a primary level, our sales execution was not what is needed to be, and I will address that. The waterfall chart shows a starting point of $53.2 million, representing first half revenues from the prior year. We've previously explained that upfront revenue -- our upfront revenue model is exposed to some level of volatility with deals closing late in the period. The waterfall chart illustrates 4 deal-related factors that led to the decline in revenue. $4.9 million was from business that did not renew. $2 million was from deals closing at a lower value. $11 million was from deals deferred beyond the first half. And $1.2 million of other net movements, including currency impacts, from a rising Australian dollar. The reasons why a contract does not renew will vary. They include customers migrating to new platforms that Prognosis does not support, bringing their monitoring in-house, moving to a competitor or budget constraints. The reasons why deals reduce in value are typically related to a shortening of contract period. What we have seen during the pandemic is some customers opting for shorter-term contracts as they work through their own uncertainties. Of the $11 million of deals deferred, $1.1 million have already closed in H2 and a further $7.3 million are forecast to close in H2. The reason that this total does not tie to the $11 million in deferrals is that some deals reduced in value because the customer is looking to contract for a shorter term. The net impact is around $2.5 million. In an upfront revenue model, this impacts the total revenue recognized for a deal in the current period. I hope this provides visibility as to what happened whilst at the same time acknowledging that factors, including sales execution and cautionary buyer behavior, contributed to the poor result. I will now hand over to Peter. -------------------------------------------------------------------------------- Peter Adams, Integrated Research Limited - CFO [2] -------------------------------------------------------------------------------- Thanks, John. We are on Slide 6 titled Revenue. Revenue for the half was down 36% to $34.1 million for reasons highlighted in the waterfall chart shown on the previous slide. With our current revenue recognition model, license fees had the largest impact on aggregate revenue being down 49% to $17.1 million. Maintenance fees of $10.3 million declined 15% over the previous corresponding period. The 3 contributors to this decline include maintenance cancellations of approximately 10%, an impact from currency translation of 3% and the residual from perpetual to term contract conversions. Revenue from SaaS fees of $125,000 relates predominantly to our early cloud products, not to be confused with our new cloud products recently released during the half. It should be noted that these new cloud solutions will provide a meaningful contribution to future revenue streams that John will talk about shortly. As the business transitions to higher SaaS revenues, it is appropriate to understand underlying performance through a pro forma revenue lens using a subscription model. This is not a new concept. We have presented pro forma revenues over the previous 3 reporting periods. The calculation of these numbers is based on amortizing the license fees over the term of the contract and adding recurring maintenance. Whilst these numbers do not form part of our statutory reporting, the pro forma equivalent subscription revenues of USD 26.6 million for the half is down 2% compared to the prior equivalent half. We have also disclosed on this slide cash receipts from customers of USD 30.6 million, which is broadly aligned to the pro forma revenue number. In summary, the statutory revenue model with the upfront license recognition provides greater volatility and is less aligned to cash flow. The pro forma revenue numbers are more stable, predictable and more aligned to cash flow. A reconciliation of statutory reported revenue to pro forma revenue is included in the appendix to this presentation. Turning to Slide 7 titled Interim Revenue Analysis by Product. We continue with our 7-year series of revenue on a statutory basis, with U.S. dollar equivalents as shown in the top half of the slide. For clarity, all these bars represent first half of each financial year. We have brought on to the bottom half of the slide the 7-year series of revenues on a pro forma subscription basis for ease of comparison. It is interesting to note that the deal commitment period can have an immediate effect on license fees recognized upfront based on the statutory model compared to the pro forma subscription revenue model that effectively straight-lines to the revenue across the contract period. You will also see later in the presentation a reduction in 5-year deals from customers during the current half relative to prior periods. Turning to the interim revenue slide on geography. The statutory results were below our expectations across all regions. There is a degree of commonality across the regions for the shortfall in statutory revenue. So perhaps a few comments on pro forma subscription trends would be appropriate at this point. We can see the Americas pro forma subscription revenues were up year-over-year from 2015 to 2020, with the exception of 2021 showing a 10% decline. Looking at the statutory chart above, it is clear the decline has been triggered by falls in license fees for 2020 and '21. The action to address this decline is to retain and grow the base on-premise together with opening up new opportunities from our new cloud solutions. APAC pro forma revenues show an upward trend year-over-year through to 2021 driven by consistent execution across both Collaborate and Transact. Europe pro forma revenues also show an upward trend across the series, driven predominantly by Collaborate and more recently Transact. Operating expenses, shown on Slide 9, are down 15% over the equivalent prior half to $32.9 million. The key takeaway from this slide is that we have maintained our spend on development, with the main reductions in expenses being across sales and administration representing decreases of 20% in each area, illustrating that we have been proactive in managing the business through the pandemic. The biggest hit to profit below the expense line has been through unrealized foreign currency losses of $3 million for the half, noting that the AU-U.S. exchange rate increased 13% across the half to finish at USD 0.77. Turning to Slide 10 headed Net Cash Flow Analysis. Despite reporting bottom line profit of $129,000, cash flow from operations was $11.3 million for the half, which was driven by a strong cash conversion rate of 124%. Translated, our cash collection from customers were strong, and there were minimal doubtful debt exposures arising during the period. The final dividend from FY '20 of $6.4 million was paid during the half. No interim dividend has been declared to preserve capital for growth. Our balance sheet, shown on Slide 11, remains in a strong position with net cash of $1.7 million at 31 December. Trade receivables of $70.3 million remain a strong source of future cash flow. We have $13.5 million undrawn in our debt facility. And I now will pass back to John who will talk about our new product launches and growth strategy. -------------------------------------------------------------------------------- John Ruthven, Integrated Research Limited - MD, CEO & Director [3] -------------------------------------------------------------------------------- Thanks, Peter. Moving to our product innovation strategy. On Slide 13 now, more than 30 years ago, IR launched Prognosis as a platform, not a product, some might say ahead of its time. But in essence, we have always been a platform company. This slide depicts in simple terms that we have continued this strategy. With the launch of our SaaS platform in December 2019, we effectively have 2 complementary platforms, on-premise and cloud. This innovation strategy enables us to support customers on their journey, whether they are on-premise, hybrid, meaning they have workloads in both on-premise and cloud, or pure cloud. In market terms, this means that our addressable market is not limited in the same way pure-play or on-premise vendors are. This strengthens our competitive edge, reduces time to market and drives greater efficiency in R&D spend. On Slide 14, we are sharing with you the new products that we have released and will release over an 18-month window. This expands our addressable market by $1 billion. Within this period, across our Transact and Collaborate product line, we will support the 3 biggest cloud-based collaboration vendors, Microsoft, Zoom and Cisco as well as entering the high-growth real-time payments market. At the same time, we'll continue to innovate and support our existing on-premise customers. Our R&D investment will continue at around 19% to 20% of annual revenue. In short, we are positioning the business for long-term growth and strengthening our competitive edge. Moving to our growth strategy. Slide 16 illustrates that IR is well positioned to benefit from cards growth and the new real-time payments market. The size of the market is immense, some 737 billion payment transactions globally in calendar year 2020, defined as noncash transactions excluding checks. Per the Capgemini World Payments Report, these volumes are growing at 11.5% CAGR out to 2023. IR's growth opportunity comes in 2 areas: firstly, card payments, where we are already well entrenched with large financial institutions and card processors like Fiserv, FIS, JPMC, Barclaycard and others. There are 2 vectors for growth: to expand our support for additional switch vendors and cross-sell, upsell cloud-based analytics. As a proof point, we concluded a new contract with ACI in late December for AUD 1.8 million for our newly launched Transact, Payments Analytics SaaS product line. Secondly, real-time payments, an emerging market globally and is the simplification of the payment process from initiation to reconciliation. We will launch our first product in this space this half, and the initial opportunity is to upsell and cross-sell existing customers. The growth in this segment is projected to be 23.4% CAGR out to 2024 per ACI's Prime Time for Real-Time Report published in April last year. Going to Slide 17. The overall unified communications market is 550 million users, as defined by Gartner, and has been low single digits for a number of years. What has changed is the acceleration of growth in the conferencing segment driven by the global shift to remote working as a result of the pandemic. The number of conferencing users grew 48% in 2020 and is projected to grow 14% CAGR out to 2024. IR has a growth strategy that is focused on this high-value segment. The opportunity is across both on-premise and cloud. First, by leveraging our strength and existing position in on-premise, supporting Microsoft, Cisco and Avaya, we will continue to support these customers. This will be a long tail because of our large enterprise customer base. We will support these customers on their journey as they transition to cloud by cross-selling and upselling our new Collaborate hybrid cloud solutions. And second, in the cloud, new products for Teams, Zoom and Webex in the digital experience monitoring category. We will also support direct routing, which, in simple terms, allows customers to use their chosen collaboration vendor with their preferred telecoms carrier. Our SaaS platform expands the conferencing opportunity for analytics upsell. A proof point of this is a AUD 3.5 million contract just signed with BT or British Telecom to provide digital experience monitoring for their DigiCo platform. Let's move to Slide 18, IR's customer base. In simple terms, IR's value proposition is selling mission-critical software to large global enterprises. We have a significant global enterprise customer base across diverse segments, which include over 25% Fortune 500 companies. Key to maintaining and growing this base of customers is our ability to innovate and evolve with them to meet current and future needs. I would now like to provide you some deeper insight into the makeup of our customer base across a number of vectors. Customer tenure. We established long-term relationships, the majority greater than 15 years. A good example is JPMC who has been a customer for more than 25 years. Contract length. Our average weighted life of a contract has typically been more than 4 years. That said, we have seen a shortening of this in the last 12 months driven by more cautious buying behavior and, in some cases, less certainty by customers on their own strategy for on-premise and cloud. New customers. There is good new business momentum with the number of new customers trending up. We expect to close more than 40 new customers this year, and our strategy calls for further acceleration. The signature win in H1 was FedEx joining our customer community, a $1.1 million deal for our Collaborate product line. And last, maintenance retention. Historically, our maintenance retention has been relatively high particularly in the Transact and Infrastructure product lines. Current conditions and cloud migration have certainly put pressure on that, as the graph shows. Moving to Slide 19. We have taken immediate steps to strengthen our performance in the second half. The plan was implemented in early January to focus on 4 themes: sales execution, SaaS, cost and business model. Sales execution focused on opportunity management, executive access and engagement with key stakeholders within the customer and alignment of time lines and expectations to close. In January, February, we have seen inbound inquiry in the U.S. return to pre-pandemic levels after tailing off towards the end of last half. And to drive momentum off the back of the launch of our SaaS product, we've made changes to commission plans as well as the organization to provide both focus and incentive. In mid-January, we implemented a head count freeze, reduced our staffing levels and centralized budget control. As part of reducing staffing levels, we've moved up some changes planned for FY '22 by increasing sales development reps or SDRs focused on new business as well as consolidating a number of functions into a technical operations organization to support our SaaS growth. The second part of the plan was a simple but important change we made by moving the focus from quarterly and half targets to monthly to drive linearity and derisk the end of half. This is a significant behavioral change, and we are not naive about the challenge. But it does move us in the direction of MRR/ARR as part of the subscription model in the future. Further prioritization of the product road map, some of which was already underway. However, we have evolved the way of working between product management and development to further prioritize Zoom enhancements, Webex and real-time payments. And lastly, internal work has been underway for some time, and we've now stepped that up as we transition the revenue model. These more tactical actions are either complete or well underway. They were implemented to strengthen second half performance. Moving to Slide 20, Key Success Drivers. Assessing where the opportunity is, the current market dynamics and how IR is positioned demands that we are clear and focused on what will drive success in the second half and into FY '22. There are 4 clear drivers. Firstly, customer retention and growth. IR's high-quality customer base is a competitive advantage. In H2 alone, we have over 100 renewal and capacity deals with existing customers. Each is an opportunity to not only maintain but to grow with the customer. Maintaining or improving our retention and renewal rates, there are 8 strategic renewals and capacity deals alone in the second half over 7 figures. These are well progressed and targeted for early closure. We expect to add over 40 new customers this financial year with our existing solutions, including 2 7-figure deals in the second half. The field coverage model is balanced between salespeople focused on growing the base and customer success managers focused on retaining the base. Our future is as a SaaS company, and we are at a critical phase of winning our first customers. We now have had 2 significant wins in both our Transact and Collaborate product lines that establish foundation customers along with some smaller wins, too. We expect to add more than 20 SaaS customers in the financial year with a solid pipeline to support this. To drive this, we've invested in additional sales development reps, developed a modern product demo capability for remote selling and stepped up our digital channels to drive demand. Driving our product innovation agenda is speed to market. By the end of this half, we will be in market supporting the 3 biggest cloud collaboration vendors and will have entered the real-time payment space. This is not the end game. We'll continue the development and enhancement of these solutions to stay ahead of our competition. To drive this, we've totally revamped our product management function with new leadership across the product line, realigned the teams on a product line basis and brought them closer to the customer. Bringing all this together is the business model transition to SaaS and subscription. This will provide better predictability and reliability of revenue streams. From a customer standpoint, it will enable us to support their journey with flexible commercial agreements. We are well advanced in this work from a systems and process perspective, including the upgrade of our financial systems last year. There is a lot to do, but we are clear and focused on what will drive success for IR. All right. Moving to Slide 21, Conclusions. Let me conclude by highlighting the key messages from today's presentation. First, the second half recovery is well underway, and we have implemented steps to drive this. Second, we have a pipeline of new products coming that will strengthen our competitive advantage and give us access to a significant new addressable market. Third, the transition of our business model is well advanced, and it will provide better predictability and reliability to operate in the future. And fourth, IR remains well positioned to benefit from structural market changes that will drive long-term growth. Operator, that concludes the presentation. We can now open it up for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Chris Savage of Bell Potter. -------------------------------------------------------------------------------- Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [2] -------------------------------------------------------------------------------- First question, that Slide 5 around deal movement, which was a great chart, just was there any sort of loss of market share or loss of deals to competitors that you don't show in that chart? -------------------------------------------------------------------------------- John Ruthven, Integrated Research Limited - MD, CEO & Director [3] -------------------------------------------------------------------------------- In the nonrenewals category, Chris, as I covered in the narrative, there are a number of reasons why a deal doesn't renew, including competitive loss. The $4.9 million is not all competitive loss. We did have some competitive loss in that. But there's also a case where a large customer is moving from on-premise to cloud. So we've -- they have not renewed their on-premise agreement with us, but they are now a prospect for us with our cloud or SaaS solution. -------------------------------------------------------------------------------- Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [4] -------------------------------------------------------------------------------- Yes. That was going to be another question I had because that Slide 18, when you said the decline in maintenance retention rate was driven partly by cloud migration and partly by the current environment. So when the customer does migrate to cloud, my question was, are they forever lost? But it sounds like you're suggesting that they're lost in the interim, but you hope to sort of regain them at some stage. Is that correct? -------------------------------------------------------------------------------- John Ruthven, Integrated Research Limited - MD, CEO & Director [5] -------------------------------------------------------------------------------- Certainly confident that we can do that with our new solutions. The reality is that there is and can be some lag in the market between the 2. So on Slide 17, we referenced a quote there from Gartner. And so as companies have gone through this change and uptick in remote working, moving to Teams, Zoom, et cetera, one of the things that they do in that process is potentially examine basic tools from -- provided by the vendor, which sometimes in the market are called native tools. Based on our customer base being large enterprise, as Gartner suggests, our experience is that they will then, as they work through that process, realize their requirements are more sophisticated than the basic functionality of those tools. And that's why we have a level of confidence that they will become prospect and ultimately customers of our new SaaS solutions. -------------------------------------------------------------------------------- Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [6] -------------------------------------------------------------------------------- And would that be directly or that would more often be through a service provider? -------------------------------------------------------------------------------- John Ruthven, Integrated Research Limited - MD, CEO & Director [7] -------------------------------------------------------------------------------- It could be either. Our -- I think in the appendix, we've got a slide that shows our go-to-market with both direct and indirect models. So it just depends on the customer itself. I mean it's a good question. Service providers have become a reasonably significant portion of our overall revenue mix. -------------------------------------------------------------------------------- Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [8] -------------------------------------------------------------------------------- Sure. And I just note, Slide 20, you talked about 100 renewal and capacity deals in H2. And then back on Slide 5, you said there were 165 deals closed in the first half. Is that a like-for-like comparison we can make? It just sounds like there are potentially less deals to be closed in the second half. -------------------------------------------------------------------------------- John Ruthven, Integrated Research Limited - MD, CEO & Director [9] -------------------------------------------------------------------------------- The 165 is total deals. So what we referenced in the greater than 100 renewal and capacity deals, that excludes new. So that also highlights the number of potential new transactions that we've got in play as well. -------------------------------------------------------------------------------- Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [10] -------------------------------------------------------------------------------- So the total deal you'd expect to close in the second half would be still well over 100? -------------------------------------------------------------------------------- John Ruthven, Integrated Research Limited - MD, CEO & Director [11] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Peter Adams, Integrated Research Limited - CFO [12] -------------------------------------------------------------------------------- And yes, I don't think it's a like-for-like comparison, Chris. So the 165 is all deals across the portfolio. The 100 that we're referencing on Slide 20 is just simply on renewals and capacity. So I would anticipate that directionally, we continue to close out what you saw on the first half in the second, if not more. -------------------------------------------------------------------------------- Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [13] -------------------------------------------------------------------------------- Sure. And just last question. I mean there's always been this back ending or back-end weighting of deals closing late December, late June. I know you're trying to bring those forward, as you mentioned, but is it -- is this half still going to be very much sort of back-end weighted towards June and the end of June? -------------------------------------------------------------------------------- John Ruthven, Integrated Research Limited - MD, CEO & Director [14] -------------------------------------------------------------------------------- Our -- I mean we've taken very proactive and determined steps to derisk the back end of the half or improve linearity. Based on the way that our forecast currently sits, we would anticipate that we will have a much less back end-loaded half than we did in the first half. We still anticipate that there's a reasonable amount of business that we close in June, but we've worked pretty hard to bring a lot of that forward. -------------------------------------------------------------------------------- Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [15] -------------------------------------------------------------------------------- And just to follow on -- sorry, I know I said last question. But does that mean you feel like you've got greater visibility on this half than you would typically at this stage of the half, like into the second month? -------------------------------------------------------------------------------- John Ruthven, Integrated Research Limited - MD, CEO & Director [16] -------------------------------------------------------------------------------- Yes, I'm reasonably confident that we do, Chris. And some of that is the sales execution steps that we took. So we've done some tactical things like assigning exec sponsors to deals. I talked about the fact that we've aligned at a more senior level and opportunities to, in plain terms, align on a joint close plan, so we understand the steps to close and the timing. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- Your next speaker is Andrew Perks from Accordius. -------------------------------------------------------------------------------- Andrew Perks, Accordius Pty Ltd. - Portfolio Manager [18] -------------------------------------------------------------------------------- I just had a few quick questions. Firstly, just on -- I suppose the highlight of the result was really if you have a look at that slide, we've got the cash receipts from customers in U.S. dollars. That was pretty much flat. So really the revenue, does that just show you -- when you -- so that's sort of the positive and sort of shows that -- your recurring revenue, but you talked about your upfront revenue model. Is that just far too aggressive? -------------------------------------------------------------------------------- Peter Adams, Integrated Research Limited - CFO [19] -------------------------------------------------------------------------------- So I think the first point is our revenue recognition model is compliant with accounting standards, and we've had that policy in place for many years. The question of whether it's aggressive or not, I mean I guess it is what it is. If we were starting this business from scratch, we'd clearly just move to subscription accounting and roll with that because that's far more predictable. So I think as we progress through the future, as you would have heard from the presentation, we will continue to present pro forma revenue so that you can see that on a subscription basis. And as we progress in time, cloud-based business is going to become a much greater proportion of the overall revenue stream. And so we're going to have these hybrid revenues coming through on a statutory basis. So we're not going to change our revenue policies. But from a commercial perspective, as time progresses, they're going to give rise to more revenue over time contracts coming through the portfolio. -------------------------------------------------------------------------------- Andrew Perks, Accordius Pty Ltd. - Portfolio Manager [20] -------------------------------------------------------------------------------- Yes, okay. So then I mean the good thing for you guys is as you move to a SaaS, you won't lose any profitability because you're starting from 0, which is kind of a positive. In that same slide on Page 6, which sort of also has your highlight, which is your cash receipts, your revenue from SaaS fees went down. But if you're moving to SaaS, isn't that like a continued -- like given that build, shouldn't that have been -- you've gone from $0.4 million to $0.1 million. Why would SaaS fees, which is -- I suppose to be a normal subscription, is that actually going to quick -- like what's with that? Because that's where you're moving to, and that's gone backwards. So why? -------------------------------------------------------------------------------- Peter Adams, Integrated Research Limited - CFO [21] -------------------------------------------------------------------------------- So the SaaS fees that are shown in the statutory results where they've gone down from $400,000 to $100,000, that relates to what I call early cloud products, which are in ramp-down mode. Our new cloud products that John referenced were only -- have only been released like literally during the first half and have not had time to ramp up. So we need -- it's sort of parting the sea here. It's the early cloud products ramping down but then new cloud products ramping up. So over the longer term, we would anticipate that SaaS fees to be quite a large number in a few years' time. -------------------------------------------------------------------------------- Andrew Perks, Accordius Pty Ltd. - Portfolio Manager [22] -------------------------------------------------------------------------------- Yes. What I read -- it actually explains a lot... -------------------------------------------------------------------------------- Peter Adams, Integrated Research Limited - CFO [23] -------------------------------------------------------------------------------- Yes. So early cloud products include the product names like UC Assessor and Skype for Business Online Troubleshooting. So Skype for Business Online Troubleshooting was built for Skype. And as we know, most corporates these days are using Microsoft Teams. So that's naturally, I guess, going to peter out. And UC Assessor was not necessarily built as a robust product line to serve over the longer term. It really is more about these new solutions that John referenced. -------------------------------------------------------------------------------- Andrew Perks, Accordius Pty Ltd. - Portfolio Manager [24] -------------------------------------------------------------------------------- Okay. So hopefully, that SaaS line grows in the future from now, the series and all those -- you've got your new products. So all those new products we talked about will be on SaaS? -------------------------------------------------------------------------------- Peter Adams, Integrated Research Limited - CFO [25] -------------------------------------------------------------------------------- Yes. So just to clarify, I think 2 of the key deals that we closed out, one on very late in the first half was with ACI, and then one more recently has been with BT. Both these deals are multimillion-dollar deals, and that -- the revenue from those contracts will be recognized over time. So in terms of FY '21, the recognized revenue will not be large because they've only just been signed. But as they ramp up, we'll start to see those revenues come through from FY '22 and following. -------------------------------------------------------------------------------- Andrew Perks, Accordius Pty Ltd. - Portfolio Manager [26] -------------------------------------------------------------------------------- Yes, okay. And just a quick question, just on your nonrenewals. That's pretty concerning that $4.9 million didn't. You mentioned -- I suppose I'd be interested in -- I mean does that keep you up at night when you think, well, who are they? What's their thing? Was it in one particular group? And how do you know that that's going to stop? Like would we expect to see that next half? -------------------------------------------------------------------------------- Peter Adams, Integrated Research Limited - CFO [27] -------------------------------------------------------------------------------- So I guess within the $4.9 million, there are a couple of large deals that we've lost. If I go back to 2016, just as an example, we lost a deal because the customer moved to a service provider for the monitoring of their unified communication -- or for the management of their unified communications. So look, I think that there's always going to be some losses. And let's face it, yes, there are competitors. But more often than not, that is not the main reason we lose. It's usually due to the changing environment that causes us to lose the customer. -------------------------------------------------------------------------------- Andrew Perks, Accordius Pty Ltd. - Portfolio Manager [28] -------------------------------------------------------------------------------- Yes. So it's that changing environment. What is that? And do you expect it to continue? -------------------------------------------------------------------------------- Peter Adams, Integrated Research Limited - CFO [29] -------------------------------------------------------------------------------- Yes. So I'll let John answer that. But effectively, it's about this on-premise-to-cloud migration. -------------------------------------------------------------------------------- John Ruthven, Integrated Research Limited - MD, CEO & Director [30] -------------------------------------------------------------------------------- Yes. Andrew, the -- as Peter said, there's certainly an element of the on-premise to cloud. There's certainly -- and we saw that in the first half. We saw pressure on budgets and projects. It's too early to call right now in terms of whether those conditions have changed dramatically in the second half. The anecdote that I did share is when we looked at our inbound inquiry, it's returned to pre-pandemic levels in January, February. So we've got some indications of early green shoots. But -- so yes, that's... -------------------------------------------------------------------------------- Andrew Perks, Accordius Pty Ltd. - Portfolio Manager [31] -------------------------------------------------------------------------------- Yes. Did you also mention that you have one client that is a nonrenewal but are now looking at potentially taking up a SaaS product? -------------------------------------------------------------------------------- John Ruthven, Integrated Research Limited - MD, CEO & Director [32] -------------------------------------------------------------------------------- Yes. So they didn't renew their on-premise agreement with us. But as a company, they also have strategic plans of moving more of their collaboration infrastructure from on-premise to cloud or SaaS. An interesting data point on that is Gartner have indicated that pre-pandemic, they had a view that large enterprise was out to, I think, 2023, '24 would be largely 60% on-premise, 40% cloud. That's largely flipped. So when we talk about an acceleration of cloud adoption, that kind of gives you a sense that that's the change. So we... -------------------------------------------------------------------------------- Andrew Perks, Accordius Pty Ltd. - Portfolio Manager [33] -------------------------------------------------------------------------------- Yes. But they probably don't come back to do that. Once they've given up, once they've had a nonrenewal, they won't come back. They'll go to another program because who's doing their monitoring now, it must be someone else. So you probably lost them for good. They won't come back to your SaaS product. Otherwise, they would have transitioned. -------------------------------------------------------------------------------- John Ruthven, Integrated Research Limited - MD, CEO & Director [34] -------------------------------------------------------------------------------- No, we wouldn't see it that way. I mean the customer in question is a long-standing customer that we retain on a number of other fronts. They're a large financial institution. It's worth highlighting that the process of companies evaluating the support and monitoring of the experience on the collaboration platforms generally starts with 3 phases of they do what they need to do. They evaluate the native or the vendor tools in that process. Our strength and our sweet spot is highly complex multi-vendor environments, of which the customer in question is one. And then as they find that their use cases are much more sophisticated than the basic tools will enable, then that's why we would remain confident that we can win them as a SaaS customer. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- Our next question comes from [David Versta of Berry Holdings]. -------------------------------------------------------------------------------- Unidentified Analyst, [36] -------------------------------------------------------------------------------- Just a quick direct question. I'm looking at the financial statements here. And it is pleasing to see over the many years that there was no long-term debt. All of a sudden, you see $10 million. Could -- I might have missed something. Could someone explain that $10 million appearing all of a sudden, long-term debt in the financial? -------------------------------------------------------------------------------- Peter Adams, Integrated Research Limited - CFO [37] -------------------------------------------------------------------------------- So I assume you're looking at the balance sheet. So the total borrowings that we should... -------------------------------------------------------------------------------- Unidentified Analyst, [38] -------------------------------------------------------------------------------- Yes. I'm looking at a Morningstar -- yes, it is. -------------------------------------------------------------------------------- Peter Adams, Integrated Research Limited - CFO [39] -------------------------------------------------------------------------------- I'm sorry. Go ahead, David. -------------------------------------------------------------------------------- Unidentified Analyst, [40] -------------------------------------------------------------------------------- This $10 million long-term debt, yes, I just want to know what it is. -------------------------------------------------------------------------------- Peter Adams, Integrated Research Limited - CFO [41] -------------------------------------------------------------------------------- Sorry, there was just -- unfortunately, there's just some muddling on the line. Can you just repeat that question one more time, please? -------------------------------------------------------------------------------- Unidentified Analyst, [42] -------------------------------------------------------------------------------- On -- what is appearing now on the financials, there's a long-term debt of $10 million. That's what I'm asking. Why is that there all a sudden? There was no long-term debt in your financials before. But we had -- now it's there, showing there now. -------------------------------------------------------------------------------- Peter Adams, Integrated Research Limited - CFO [43] -------------------------------------------------------------------------------- Yes. So I'm looking at the consolidated balance sheet. And we had borrowings of $6.5 million for 31 December. And at 30 June, we actually had borrowings of $5 million. So I guess if you look back in history, the company has had a very long period of time where debt has not been on balance sheet. So the first time the company experienced debt was at 30 June. And basically due to the cash flow movements that we've been through, we are obviously supporting our investment into innovation, which gives rise to having debt on balance sheet. -------------------------------------------------------------------------------- Unidentified Analyst, [44] -------------------------------------------------------------------------------- Okay. No, it just sticks out. You see it on financials, and all of a sudden, there's $10 million that appears in it. There's no explanation anywhere that I can find. -------------------------------------------------------------------------------- Peter Adams, Integrated Research Limited - CFO [45] -------------------------------------------------------------------------------- Yes. Sorry, I'm acknowledging that we've got debt on balance sheet, but I'm struggling to see the $10 million that you're referencing. -------------------------------------------------------------------------------- Unidentified Analyst, [46] -------------------------------------------------------------------------------- Okay. I'm looking at a Morningstar report, okay. -------------------------------------------------------------------------------- Peter Adams, Integrated Research Limited - CFO [47] -------------------------------------------------------------------------------- Oh, okay. Right, yes. Well, I can't vouch for that. And I'm happy... -------------------------------------------------------------------------------- Unidentified Analyst, [48] -------------------------------------------------------------------------------- Sure. And... -------------------------------------------------------------------------------- Peter Adams, Integrated Research Limited - CFO [49] -------------------------------------------------------------------------------- I'm happy, if you want to have a longer conversation about this, to come through the front desk, and I'd be happy to talk you through the numbers. -------------------------------------------------------------------------------- Unidentified Analyst, [50] -------------------------------------------------------------------------------- That would be good because I'm looking at your website right now, and it's difficult to actually get into anything because I've got a little chat box coming up there and that she didn't know the answer to the question. So that's why I'm asking you. Well, all right. -------------------------------------------------------------------------------- Peter Adams, Integrated Research Limited - CFO [51] -------------------------------------------------------------------------------- Right, yes. Okay. No problem. Let's have a chat later, and we can walk through it. -------------------------------------------------------------------------------- Operator [52] -------------------------------------------------------------------------------- (Operator Instructions) There are no further questions at this time. I will now hand back to Mr. Ruthven for closing remarks. -------------------------------------------------------------------------------- John Ruthven, Integrated Research Limited - MD, CEO & Director [53] -------------------------------------------------------------------------------- Thank you, operator, and thank you, everyone, for dialing in today for our first half results announcement. If I can quickly recap where I left off on my presentation around the concluding remarks, there are 4 things that are significant that I'd like you to take away from today's presentation. The first is that our second half recovery is well underway, and we are absolutely focused on sales execution to drive that result. We've got a pipeline of new products coming. We've talked extensively about that, but Teams, Zoom, Webex, real-time payments, gives the company a very bright future in terms of access to $1 billion of new addressable market. We're also in -- a company in transition particularly around our business model as more of our revenue comes through the door as subscription revenue that will drive fundamental changes in our business. And we're well advanced and ready for that change. And lastly, we remain well positioned to benefit from the structural market changes, real-time payments, remote working and cashless payments. And with that, we look forward to discussing our performance in more detail over the next few days. We have meetings set up with a number of you, and we look forward to that opportunity. Thanks again.