Revenue May Stabilize While Profit Margins Decline In The Coming Years

Key Takeaways

• Strong emphasis on performance and scalability in software solutions positions Integrated Research as a leader in its industry.
  
• Continued investment in R&D aims to drive innovation, although profitability could be impacted by increased operational costs.
  
• Heavy reliance on contract renewals and inconsistent new business pose risks to revenue stability, compounded by regional market challenges and high R&D costs impacting future earnings.

Catalysts

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

Integrated Research Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Integrated Research's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 28.8% today to 16.8% in 3 years time.
• Analysts expect earnings to reach A$14.3 million (and earnings per share of A$0.09) by about April 2028, down from A$20.5 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 12.7x on those 2028 earnings, up from 3.8x today. This future PE is lower than the current PE for the AU Software industry at 61.5x.
• Analysts expect the number of shares outstanding to grow by 0.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.64%, as per the Simply Wall St company report.

Integrated Research Future Earnings Per Share Growth

Risks

• The company's heavy reliance on contract renewals, which are described as lumpy revenue sources, could lead to unstable cash flows and unpredictability in revenue if not countered by new business growth. This impacts overall revenue stability.
  
• The significant decline in statutory revenue (down 29% year-on-year) and EBITDA (down 58% year-on-year) highlights the financial impact of slower renewals and inconsistent new business, pointing to potential challenges in maintaining net margins.
  
• Europe's underperformance, with a 17% decline in pro forma revenue, suggests potential regional market challenges or competitive pressures that could further affect earnings and revenue diversity.
  
• Concerns about the renewed product-led growth strategy suggest the risks of inefficiency in execution, high R&D costs without guaranteed returns, and a potential strain on net cash, impacting future earnings.
  
• Market skepticism about capital management and cash allocation, with emphasis on product investment over immediate shareholder returns such as buybacks, suggests risks to perceived shareholder value, impacting earnings per share growth.

Valuation

• The analysts have a consensus price target of A$0.8 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$85.2 million, earnings will come to A$14.3 million, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 7.6%.
• Given the current share price of A$0.44, the analyst price target of A$0.8 is 45.6% 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.