Shifting To High-Value Clients And Launching IR Labs May Improve Stability, But Challenges Remain

Key Takeaways

• Strategic focus on high-value enterprise customers and efficient cost management is expected to enhance net margins and revenue stability.
  
• Initiatives like IR Labs and a strong renewal pipeline are poised to drive innovation and future revenue growth through new market segments.
  
• Persistent churn in the Collaborate line and reliance on high-value customers risk revenue stability amid currency losses and competitive pressures in Europe.

Catalysts

Designs, develops, implements, and sells systems and applications management computer software for business-critical computing, and unified communication and payment networks.

• Integrated Research is focusing on the sweet-spot of high-value, complex customer environments, which is expected to both drive growth and reduce churn. This focus on larger enterprise customers is likely to improve revenue stability and increase net margins due to more extensive and reliable contracts.
  
• The launch of IR Labs, a new business incubator, aims to accelerate ideation for next-generation product development. This initiative is likely to enhance the company’s competitive position and drive future revenue growth, as innovative products can capture new market segments.
  
• The company is implementing a capital management plan to balance investments for growth with shareholder returns, including organic and inorganic growth opportunities. This strategy is expected to improve earnings as capital is strategically deployed towards high ROI projects.
  
• Integrated Research has a strong renewal book with a significant pipeline for new business and upsells, particularly in its Collaborate product line. This is anticipated to result in higher revenue and an improved net revenue retention rate, benefiting overall earnings.
  
• The organizational optimization to support product and market focuses, along with cost management efforts, should enhance operating efficiencies. This disciplined approach to costs and focusing on high-yield areas is expected to positively impact net margins over time.

Integrated Research Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Integrated Research's revenue will decrease by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 32.6% today to 15.7% in 3 years time.
• Analysts expect earnings to reach A$12.4 million (and earnings per share of A$0.07) by about February 2028, down from A$27.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, up from 2.7x today. This future PE is lower than the current PE for the AU Software industry at 70.6x.
• Analysts expect the number of shares outstanding to grow by 0.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.03%, as per the Simply Wall St company report.

Integrated Research Future Earnings Per Share Growth

Risks

• The persistent churn in the Collaborate product line, particularly with smaller customers migrating to UCaaS environments, poses a risk to maintaining revenue levels and could lead to declines if not addressed by shifting focus to larger enterprises.
  
• A 1% decline in annual recurring revenue (ARR) and lower pro forma revenues indicate potential challenges in sustaining stable revenue streams, particularly if new client acquisitions do not compensate for churn and downsell.
  
• Currency exchange losses have negatively impacted pro forma EBITDA, suggesting potential risks to net margins and overall earnings if such issues continue.
  
• The challenges in achieving satisfactory outcomes in the European market and Collaborate headwinds across geographies underscore competitive pressures that could affect revenue growth in these regions.
  
• The reliance on a limited set of high-value complex customer environments for future growth implies possible revenue volatility if these targets do not materialize or convert as expected, thereby impacting market strategy execution and earnings stability.

Valuation

• The analysts have a consensus price target of A$0.75 for Integrated Research based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$79.1 million, earnings will come to A$12.4 million, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of A$0.42, the analyst price target of A$0.75 is 44.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.