Readytech Holdings Ltd

ASX:RDY

Earnings Call Transcript 2021-Q2

[Operator]

Thank you for standing by, and welcome to ReadyTech Holdings Limited H1 FY '21 Call. [Operator Instructions]I would now like to hand the conference over to Mr. Marc Washbourne, CEO. Please go ahead.

[Marc Washbourne, CEO & Executive Director]

Thank you, and good morning, everyone. Thanks for joining and taking the time for our investor call. With me today is Nimesh Shah, ReadyTech's CFO. I'd firstly like to thank the entire ReadyTech team for the exceptional work throughout the half and their contribution to today's results.We're delighted to present the company's H1 FY '21 results that saw ReadyTech deliver strong growth and have us on track to meet FY '21 earnings guidance. The half has clearly reinforced the mission-critical nature of ReadyTech's next-generation SaaS solutions and validated our strategy of providing cloud-based software that is both people-centric and highly flexible in a fast-changing world.Moving on to the key operational and financial highlights on Slide 3. ReadyTech has delivered strong revenue growth and progression on all key metrics. Most importantly, this slide shows that we are on track to achieve FY '21 guidance of mid-teens revenue growth and EBITDA margin in the range of 37% to 39%.Revenue grew 13.4% for the half to $21.8 million. Our levels of recurring revenue, customer lifetime value to customer acquisition cost, or CLTV to CAC, customer revenue retention and cash flow conversion are all at healthy levels.Lastly, our key strategy to target higher-value customers is paying dividends, with average revenue per customer up 22.3% to $11,800 for the half.Turning to Slide 4 and on to new business. A core part of our strategy has been not only to expand our customer base but to onboard higher value and blue-chip customers. During the half, annualized revenue per new customers has grown 49% to $42,500, with many new customers signed up above $100,000.I'm pleased to note that the momentum continues, backed by a strong revenue pipeline of $13 million. We're confident of solid conversion in the period ahead, given we have achieved a win rate of 65% over the last 12 months.New customer logos in both our Education and Workforce Solutions verticals are provided on the right-hand side of the slide, which we'll cover later in the presentation. One worth highlighting at this point is MAX Solutions, Australia's largest back-to-work provider.MAX have more than 1,500 users, which puts them at the upper end of the high-value customer range. Central to winning new business has been our investment in sales and marketing and R&D with more than 20 new hires in the last 12 months, which will serve to underpin future growth.For some of you who are new to ReadyTech, Slide 5 depicts our strategic priorities. We see our business model as a continuous flywheel that propels itself forward through growth and reinvestment. We will continue to focus on our strategic priorities by investing in new products and R&D, retaining and winning new customers, increasing recurring and subscription revenue and scaling and increasing profitability of the business. At the same time and as previously stated, we have increased our focus on new verticals, as evidenced by the proposed acquisition of Open Office, which we turn to on the next -- on the next slides.On to Slide 6. A key pillar of ReadyTech's growth strategy is to explore new and attractive verticals for mission-critical SaaS and to enter those verticals via acquisition where compelling opportunities present.In line with that strategy, ReadyTech has committed to acquiring leading government SaaS provider Open Office. The value of the acquisition is for an up-front consideration of $54 million and earnout consideration of an additional $26 million. As announced on the 15th of February 2021, ReadyTech will hold an EGM on the 19th of March 2021 to seek shareholder approval of the Open Office acquisition amongst other resolutions. If approved, ReadyTech is targeting completion of the proposed acquisition of Open Office to occur on the 23rd of March 2021, subject to satisfaction or waiver of the conditions precedent.In terms of the investment highlights on Slide 7. Firstly, Open Office is a leading platform with strong penetration in the government and justice verticals. It offers an attractive entry point into large addressable markets for ReadyTech, given organizations in the government and justice markets are migrating to cloud and digitizing at a record pace.Like ReadyTech, Open Office has strong visibility over future revenues given high recurring subscription revenue, long-established sticky customer relationships and retention rates of more than 95%. Similarly, it has a well-diversified customer base and low levels of customer concentration. We see strong growth opportunities for the combined business, and assuming completion, we look forward to welcoming Open Office's experienced management and founder shareholders into the ReadyTech leadership team.Slide 8 provides further detail, but worth noting a couple of key callouts. Open Office operates in large addressable markets. Indeed, there are over 500 local councils and over 200 global justice departments. The global opportunity has been validated by the recent contract win in the U.K. at the Ministry of Justice in the Justice Case Management segment. This will provide ReadyTech with a beachhead from which to drive international growth in ReadyTech platforms in the future.Slide 9 gives a sense of the complementary nature of the Open Office product offering. Key solutions include asset and property management, licensing, compliance and environment, finance, HR and payroll, customer service management, community 24/7 and courts and Justice Case Management. The distinctive value proposition that underpins these solutions and differentiates Open Office in the market are its citizen-centric user experience, end-to-end and modular advanced functionality, seamless customer onboarding process and its modern cloud-based architecture.Turning to Slide 10, as many investors will be aware, digital transformation is accelerating across the technology landscape. ReadyTech is best positioned to capitalize on this in its 2 existing verticals, Education and Workforce solutions. Assuming the Open Office completion, we will soon be able to enjoy new areas of growth in the government vertical.As a reminder, we provide our clients with next-generation mission-critical SaaS solutions. Our SaaS approach is designed to be customer-centric and based on strong usability and platform agility. Driving growth, we have one high-performing culture across all segments as well as a shared and extensible platform of best practice SaaS disciplines.I will now hand over to Nimesh Shah, our CFO, to cover the financial highlights.

[Nimesh Shah, CFO & Joint Company Secretary]

Thanks, Marc. On Slide 12, we provide an overview of ReadyTech's P&L. Total revenue for the half was up 13.4% to $21.8 million. This was driven by strong growth in subscription and license revenue, up 15.6% to $19.4 million. The company maintains a high percentage of recurring revenue, which represents 89% of total revenue.Revenue growth was achieved from a combination of new customer wins as well as upsell and cross-sale of products and services to existing customers. Average revenue per customer has grown 22.3% to $11,800, and customer lifetime value has increased 33% to $81,400.Total expenses of $13.5 million reflect continued investments in sales and marketing, which is now 9.6% of revenue compared to 7.4% in the first half of FY '20, and continued investment in R&D with annualized cost of 12.3% -- $12.3 million, representing growth of 7.9% compared to FY '20.Importantly, EBITDA margin for the half of 37.9% is in line with full year guidance of FY '21 of 37% to 39%.Turning to balance sheet and cash flow on Slide 13. At half year end, we have cash and cash equivalents balance of $34.2 million, which includes the proceeds of the capital raising earmarked for the Open Office transaction. Adjusted for this, cash balance is $9.9 million.As of 31st December, we have $22.5 million debt drawn and additional $5 million headroom, representing an adjusted leverage ratio of 0.9x.In February 2021, ReadyTech refinanced existing debt facility for another 3 years, which caters for the funding of the Open Office transaction. We expect to remain conservatively geared towards the Open Office completion with an expected leverage ratio of 1.5x on a pro forma combined group basis.Operating cash flow before interest, tax and capital expenditure was $7.2 million, a conversion rate of 87% of EBITDA.I will now hand over back to Marc to cover the performance of our Education and Workforce Solutions segment and also outline how we see our growth profile going forward.

[Marc Washbourne, CEO & Executive Director]

Thanks very much, Nimesh. As a reminder, our education vertical includes student management and work pathways systems. Slide 15 presents these segments in identifiable addressable markets. ReadyTech has a strong pedigree in the private college and back-to-work markets where we are demonstrably the market leader. We also enjoy excellent prospects for growth across the entire vertical, with the strongest pipeline in enterprise opportunities where we are earlier in our market penetration journey.Turning to Slide 16, we highlight some notable customer wins in the education vertical during the half, which is testament to strong activity being generated by our sales teams. Key wins across the vertical included Australia's largest employment services provider, MAX Solutions, diversified VET provider, St George & Sutherland Community College, and Audi Australia to manage enterprise training programs. A consistent theme across these customers as to why ReadyTech won the business was our sector expertise, ability to deliver on the customers' needs and the quality of our advanced technology, all reinforced by our reputation in the market.On to Slide 17. During the half, we launched our integrated Learning Management System, or LMS, which will further support our expansion in the enterprise market and provide a new upsell opportunity to our existing base. Our landmark BKI TAFE project is progressing well, on track for go live in H1 FY '22 and providing good support for our growing reputation in the enterprise space.In terms of the financial detail for the Education segment on Slide 18, revenue grew 9.5% to $11.7 million, which delivered 11.7% growth in EBITDA to $5.4 million. The top line was driven by both strong new business and upgrades from existing clients. Evidence of our penetration into high-value and the enterprise clients is reflected in the 68% growth in average revenue per new customer.Moving on to Workforce Solutions and on to Slide 20. ReadyTech offers an all-in-one platform which has strong differentiators in the mid-market. This includes fully integrated recruitment, onboarding, time and attendance and rostering, awards interpretation, payroll and HR modules on one next-generation platform.Just one notable feature and new innovation being released for customers is facial recognition for time capture, which provides seamless and contact-free workflow, which is even more attractive due to COVID-19 from a risk management perspective.Turning to Slide 21, we call out just some of the key sales converted during the half. These included the building products retailer Dahlsens, leading day spa and wellness network Endota Spa, and childcare center group Precious Cargo. As you can see, mid-sized organizations are experiencing issues with legacy and disconnected people management systems.Apart from the efficiency and automation offered by our integrated technology, clients choose our unified platform for its accuracy as a single source of truth.At the bottom of the slide, we highlight that the integrated platform is not only attractive to new customers. There is a clear upsell opportunity in the existing customer base, where we typically see a 3x revenue uplift when a client upgrades from payroll-only to the full ReadyTech product suite.Slide 22 adds financial detail behind this. Revenue growth was very strong at 19.4%. As planned, the Workforce segment continues to deepen investment in sales and marketing due to the opportunity that we see in front of us. Sales and marketing costs increased to 8.7% of revenue from 6.8% in the prior corresponding period. Similar to the Education segment, we are seeing very efficient use of this spend with CLTV to CAC of over 7x.Turning to the outlook on Slide 23. With the strong momentum in H1 FY '21 and positive outlook, we reaffirm the previously provided earnings guidance. ReadyTech expects FY '21 revenue growth in the mid-teens, with EBITDA margin in the range of 37% to 39% excluding the Open Office transaction.This brings us to the end of today's presentation and Slide 24. To summarize the key takeaways, ReadyTech saw strong demand from new high-value customers in the half with 49% growth in average revenue of new customers. Momentum continues backed by a strong revenue pipeline of $13 million with a 65% win rate achieved over the last 12 months. We see strong and scalable growth in earnings into the future, underpinned by a 27% increase in customer lifetime value to $81,400 from $64,100 in FY '20.Digital transformation is accelerating in the markets in which we operate. A large part of the benefits from government support programs, such as JobTrainer are still to be realized. With business and education providers having navigated COVID-19, they are now having to consider not only their digital agendas, but also their long-term approach to remote and flexible work and learning. ReadyTech is very well placed to capitalize on this opportunity.We're making continued investment in sales and marketing, technology and talent to underpin top line growth, and we reiterate guidance for revenue growth rate in the mid-teens, with EBITDA margin in the range of 37% to 39%, excluding Open Office.Thank you again for your time, and we will now open for questions.

[Operator]

[Operator Instructions] Your first question comes from Cameron Halkett from Wilsons Advisory.

[Cameron Halkett, Research Analyst]

Good result and good start to the year. The first one, Marc, the effective tax rate [ fell in ] the first half. I'm just wondering how I can think about that going forward. And what was the benefit within that half that saw [indiscernible]?

[Marc Washbourne, CEO & Executive Director]

Terribly, sorry, Cameron. The line was a little difficult to hear you. Would you mind repeating?

[Cameron Halkett, Research Analyst]

So I was just checking on the effective tax rate in the first half, which appears to be [ a bit ] better than previous. Just wondering some of the benefit of that. And will that reverse going forward?

[Nimesh Shah, CFO & Joint Company Secretary]

Yes. Thanks, Cameron. So yes, let's see, effective tax rate is lower for this half, primarily due to impact of transaction costs on making -- on Open Office transaction and some prior period R&D [ refunds ] coming into the half. Going forward, we see the effective rate at between mid- to high 30% we stated back.

[Cameron Halkett, Research Analyst]

Okay, perfect. Second one is just around the timing of new hires. I can see you've got quite a few listings on your website on open positions. So I'm just wondering will the timing of those new hires have a material impact on where you land on EBITDA guidance for the year?

[Nimesh Shah, CFO & Joint Company Secretary]

Yes. Good question, Cameron. This is all in line with strategy in our guidance of 37% to 39%. It's all baked in. And if you look at those roles, they're predominantly on sales and marketing and R&D. It is right on strategy.

[Cameron Halkett, Research Analyst]

Okay. And then final one is just around Open Office. At the time of announcement, it was mentioned they had around 130 customers. I just note today that that appears to have shot up to 137, plus McGirr with 16. I'm just wondering since announcement, has Open Office continued to gain momentum and if you can say anything on that?

[Marc Washbourne, CEO & Executive Director]

Yes. I think that's certainly what we saw during the due diligence, Cameron, is that, firstly, I would say that they have particularly sticky customers. And firstly, you do see continued growth from -- spend from the existing customers. They have a very broad array of additional modules that they can upsell. And yes, the business has continued to win new customers as well during the last period, the last few months. And the pipeline looks very positive as well. So yes, feeling optimistic about the future with Open Office.

[Operator]

[Operator Instructions] Your next question comes from Ken Wagner from Petra Capital.

[Ken Wagner]

Just looking at your Education business sort of sequentially. So going back to second half of '20 and going in the first half, what now that you just reported on, it looks like the margins have expanded pretty substantially there. I'm just curious about what's the drivers of that given you would have had probably maybe a bit less than $1 million worth of BKI at implementation and presumably low margin. Could you just talk about what's happened there, please?

[Nimesh Shah, CFO & Joint Company Secretary]

Yes. Look, Ken, it's a good question. When we've mentioned FY '20 results, we say quarter 4, we had 55% growth of new clients, and that can flow into this half. And those clients, as we mentioned at that time, are very high margins. So [ all rise ], and their incremental margin is very good. And we see the full year impact of that coming through. So that's predominantly the reason behind that.

[Ken Wagner]

Yes. Presumably, that would have a bigger impact in the second half, given that you'd only have sort of a partial half contribution so far. If you look at the numbers, it's only gone -- revenue-wise it's has only gone from, I think, second half '20 was about $10.5 million to $11.7 million now. So -- and given some of that's BKI, I guess, that's [ indicative ] other stuff to come through in the second half? Was that close?

[Nimesh Shah, CFO & Joint Company Secretary]

Yes, that would be about right, yes. Yes. We will get the full half impact in half 2.

[Operator]

There are no further questions at this time. I will now hand back to Marc for closing remarks.

[Marc Washbourne, CEO & Executive Director]

Yes. Thank you very much, everyone, for attending today. I think that we really feel that given the environment that we're in, it's been a very solid set of results. And we very much look forward to meeting with investors over the coming weeks. So thank you for joining.

[Operator]

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.