Announcement PDF 2023 annual report Annual Report 2023 Contents 2 Financial Update 3 Our Customers 4 Chairman’s and CEO’s Letter 9 About IR 10 Directors’ Report 20 Remuneration Report (audited) 31 Corporate Governance Statement 38 Consolidated Statement of Comprehensive Income 39 Consolidated Statement of Financial Position 40 Consolidated Statement of Changes in Equity 41 Consolidated Statement of Cash Flows 42 Notes to the Financial Report 69 Directors’ Declaration 70 Auditor’s Independence Declaration 71 Independent Auditor’s Report 77 Shareholder Information 79 Corporate Directory 1 2 Integrated Research Limited Financial Update (A$M) Revenue EBITDA 12.1 69.8 62.9 8.5 11% Jun-22 Jun-23 42% Jun-22 NPAT (Excl impairment)* 2.6 Jun-23 Cash Receipts from Customers 75.5 76.3 1.5 65% Jun-22 Jun-23 * NPAT excludes $31.8m impairment of goodwill and intangible assets. 1% Jun-22 Jun-23 Annual Report 2023 3 Our Customers Net Operating Cashflow 16.9 5/10 13.8 top US telcos 18% Jun-22 7/10 Jun-23 Net Cash top US banks 18.6 5/20 9.3 100% Dec-22 Jun-23 largest Australian companies (market cap) 4 Integrated Research Limited Chairman’s and CEO’s Letter Dear Shareholders, On behalf of the Board, we are grateful for your ongoing support of Integrated Research Ltd (IR). Last year, we shared how we are transforming our business, in the face of external and internal execution challenges. This year we have continued the work to transition the business and improve our execution. John Ruthven Peter Lloyd Annual Report 2023 Our three-phase strategy of innovation, execution and scale continues to be the driving force for the business. However, the execution phase has been extended as we focus on getting the business fundamentals right. We are refining our Go-To-Market model, to ensure that we are more closely aligned with nearer-term customer needs and increasing our focus on winning new business. This includes new customers for our current product portfolio and selling new products to our existing customers. We are confident that we have the right strategy in place for this phase of our business. FY23 Report The Company achieved normalized profit after tax for the year of $2.6 million, excluding a non-cash impairment charge resulting from an impairment assessment forecast reflecting current trends in new business, renewals, and expense growth. The lead performance indicator, Total Contract Value or TCV was $68.5 million for the year. Subscription revenues for the period was $68.3 million. Statutory revenue for the period was $69.8 million, up 11% over the prior year. Cash receipts from customers totalled $76.3 million. Our cash conversion rate for the year improved to 101% as a result of the strong cash collection in the year. From a regional perspective, APAC continued its strong growth trajectory up 36%. The Asia Pacific growth was across all products and new business and renewals. Europe too continued its return to growth up 18% pcp. Our largest geographic region – the Americas witnessed growth as well. Whilst modest, TCV was up 5% pcp. Cash at bank was up strongly on the back of good collections discipline. Cash and trade receivables increased $1 million on the prior year. Receivables remain a strong source of cashflow. The Company remains debt free. 5 Driving momentum in FY24 Our FY23 results demonstrated our commitment to transform our business into a more efficient organization. Our effort is not only to identify opportunities to transition our business, but to better execute on how we do business. A key focus is on reducing the cost of doing business and improving the company’s working capital position. We have refined our product innovation approach, to address near-term opportunities with customers and prospects. An enhanced business case discipline will reduce development cycles tied to validated customer use cases, in some cases leveraging a co-development model. We will continue to improve our working capital in order to self-fund future strategic options. The FY24 renewals book is up on the prior year and weighted to the second half as well as the Collaborate product line. Our Collaborate business will continue to focus on large, complex, multi-vendor enterprises where our value proposition and price point resonate more strongly. We are also focused on enterprises where there will be a longer tail for our on-premises solutions. Examples of these include large critical healthcare providers, higher education institutions and law enforcement as well as large global enterprises. 6 Integrated Research Limited Some of the challenges we face in Collaborate are customers moving away from their on-premises infrastructure which has been our core strength, customers utilizing vendor tools for their cloud-based deployments and data limitations from vendor APIs. To address these challenges, we are leveraging our extensive large enterprise customer base where the average number of seats is greater than 25,000, and their environments are inherently more complex. Two significant drivers of demand for our Transact product line remain compliance and real-time payments. ISO 20022, an electronic messaging global standard for financial information is driving compliance requirements for large financial institutions and payment processes. Many countries have been rolling out real-time payment schemes, creating new challenges for monitoring and managing these rails. We are targeting customers and prospects with existing products and value-added services to address these challenges. We have also re-balanced our Go-To-Market strategy to align more closely with our customer’s journey. The challenges for Transact include the industry dynamic of slow adoption of new products, difficulty in projecting how the segment evolves with cloud, and navigating large vendor priorities as well as the emergence of new competition in response to changing market dynamics. Our Infrastructure business continues to benefit from the long-term commitment of our existing customers to the NonStop platform. This results in committed long term contracts as well as increasing capacity, and product enhancements. The challenge remains that over time a number of customers are migrating away from NonStop to other platforms as well as opportunities to consume infrastructure-as-a- service (IaaS). Looking Ahead Customers have acknowledged the value we bring to them through the annual customer survey we conduct, highlighting the quality of our products, the missioncritical nature of what we do and how we help them resolve complexities in their business. While the focus remains on our three product lines of Collaborate, Transact and Infrastructure, we are broadening our monitoring strategy and leveraging targeted co-development opportunities with key customers. We are also extending our 3rd party alliances and partnerships to extend our value proposition. We are confident that these initiatives are key to our execution and growth. The teams are working hard behind the scenes to improve the conversion of our existing pipeline of prospective customers and are building to nearterm customer requirements to make sure that the technology we have built is well utilized by customers. Key priorities We have defined a clear and consistent set of priorities as we work hard to continue the business growth trajectory. 1. Field leadership in all three regions continue their focus on improved field discipline, renewal yield and new business pipeline. 2. We have rolled out a commission plan that rewards ‘new’ business. 3. The renewal book is stronger in FY24, and is expected to benefit from the processes, cadence and discipline implemented in FY23. We are very focused on addressing some of the challenges impacting Collaborate renewals. 4. In FY23 we flexed our approach to innovation and R&D spend. We will benefit from this approach in FY24 with customer-driven solutions, co-development with customers and vendors and a near-term focus. 5. Our cash position has strengthened, and we have done some balance sheet repair. Through prudent cost management and operational performance, we will continue the improvement of the company’s working capital position to fund growth. Dividend In line with the Company’s objective of retaining a strong balance sheet, the Board has not declared a dividend for the full year. The solid cash position will enable IR to weather the external capital market forces and ongoing self-funded innovation for growth. We are paving the way for a new chapter of growth. Our Board is confident that through this next phase, the changes we have made will be the building blocks of a stronger business performance in FY24. In closing, we would like to extend our gratitude to our team, customers, and shareholders. Regards, Peter Lloyd Chairman John Ruthven Chief Executive Officer Annual Report 2023 connect the dots to ensure technology delivers on its promise 7 8 Integrated Research Limited create great when it matters most Annual Report 2023 9 About IR IR is the corporate brand name of Integrated Research Limited, the leading global provider of experience management solutions for business-critical technology environments. The modern world relies on a complex array of technologies to keep turning. IR’s aim is to simplify that complexity and enable their customers to create great experiences, insights, systems and connections, when it matters most. IR offers three key solution suites - Collaborate, Transact and Infrastructure - powered by the Prognosis platform, enabling a deeper level of insight to turn real-time data into real-time intelligence. These solutions enable performance management, analytics, and business insights, and are used by many of the world’s largest organizations including major stock exchanges, banks and telecommunication companies, to keep their critical technologies running as they should. Our purpose is to create great when it matters most. Our mission is to connect the dots to ensure technology delivers on its promise. IR Collaborate IR Transact IR Infrastructure IR Collaborate offers enterprise grade performance management, testing solutions and analytics across voice, web, video and collaboration ecosystems. Analyse transaction data, deploy new technology with confidence and ensure a seamless payments experience to keep your card, high value and real-time payments business flowing. Access real-time insight into HPE Non-Stop environments to help manage IT performance, spot patterns in data, proactively prevent problems, and build a solid foundation for business-critical systems. IR Transact simplifies the complexity of managing modern payments ecosystems, uncovering unparalleled insights and turning data into intelligence to help you optimize the commerce that connects our global economies. IR Infrastructure provides the insight organizations need to make informed business decisions and ensure systems are running efficiently to optimize the mission-critical environments that connect our world. Whether your environment is on-premises, in the cloud, or hybrid, IR Collaborate simplifies the complexity of modern unified communication and collaboration environments, providing the insight you need to ensure your most essential business systems, provide a seamless experience and optimize the collaboration that connects your people. 10 Integrated Research Limited Directors’ Report The Directors present their report together with the Financial Report of Integrated Research Limited (“the consolidated entity”), being the Company and its controlled entities, for the year ended 30 June 2023 and the Auditor’s Report thereon. Review of operations and activities Principal activities Integrated Research Limited’s (the “Company” or “IR”) principal activities are the design, development, implementation and sale of systems and applications management computer software for business-critical computing, Unified Communication networks and Payment networks. Group overview Integrated Research has a long heritage of providing performance monitoring, diagnostics and management software solutions for business-critical computing environments. Since its establishment in 1988, the Company has provided its Prognosis products to a cross section of large organizations requiring high levels of computing performance and reliability. Prognosis is an integrated suite of monitoring and management software, designed to give an organization’s management and technical personnel operational insight into and optimise the operation of their HP NonStop, distributed system servers, Unified Communications (“UC”), and Payment environments and the business applications that run on these platforms. Integrated Research has developed its Prognosis products around a fault-tolerant, highly distributed software architecture, designed to achieve high levels of functionality, scalability and reliability with a low total cost of ownership. Integrated Research services customers in more than 60 countries through direct sales offices in the USA, UK, Germany, Singapore and Australia, and via a global, channel-driven distribution network. Integrated Research’s customer base consists of many of the world’s largest organizations and includes major stock exchanges, banks, credit card companies, telecommunications carriers, technology companies, service providers and manufacturers. The Company generates its revenue from licence fees, recurring maintenance, testing solutions and professional services. Revenue from the sale of licences where there are no post-delivery obligations is recognised at the date of the delivery. Revenue from maintenance contracts is recognised rateably over the service agreement. Revenue from professional services and testing solution services is recognised over the period the services are delivered. The Company has recently expanded its product offering to Software as a Service (“SaaS”) with the introduction of cloud-based solutions. SaaS revenues are classified as subscription fees and are recognised rateably over the delivery period. Review and results of operations Overview The Company reported an annual loss after tax of $29.2 million, representing a significant decrease on the prior year as a result of a non cash asset Impairment. Revenue for the year was $69.8 million, up 11% over the prior year. The improvement in revenue performance was the consequence of more stable trading conditions and a strong renewal portfolio. The first half of the financial year was the Company’s strongest period for sales, with most renewals occurring in the first half. Sales execution risk mitigation continued to be a focus of management, and pleasingly all regions improved over the prior year. New business sales were marginally lower than the preceding year. The Company benefited from currency gains of $0.9 million (prior year gain of $1.6 million) and other income of $0.5 million (prior year $1.4 million). These amounts are included in other gains and losses of the Consolidated Statement of Comprehensive Income. Revenue The following table presents Company revenues for each of the relevant product groups: In thousands of AUD 2023 2022 % Change Collaborate 39,368 34,324 15% Infrastructure 14,667 13,240 11% Transact 12,127 8,249 47% Professional services 3,666 7,054 (48%) Total revenue 69,828 62,867 11% 11 Annual Report 2023 Collaborate revenue of $39.4 million, increased by 15% over the prior year. The Collaborate market continues to have significant change with customers moving toward cloud and hybrid environments and reducing their footprint of on-premise collaboration tools. This has increased the risk of churn on the Company’s on premise collaborate solution. The constant currency net revenue retention rate for Collaborate was 79% (2022: 88%). Licence fees for Collaborate were $24.5 million, up 24% over the prior year. SaaS revenues for Collaborate were $2.5 million, up 101% over the prior year, noting that the revenue from cloud-based products is recognised over time. Infrastructure revenue of $14.7 million, increased by 11% over the prior year. Transact revenue of $12.1 million, increased by 47% over the prior year. Licence transactions sold during the year were closed on a multi-year term basis with maturities ranging from an average three to five years. The following table presents Company revenues for each of the relevant geographic segments in underlying currencies: 2023 2022 % Change Asia Pacific (A$’000) 17,219 15,150 14% Americas (USD’000) 28,113 27,618 2% Europe (£’000) 5,755 5,228 10% Asia Pacific revenue of $17.2 million, was up 14% over the prior year. The region achieved growth across all product lines with a combination of new business, capacity and renewals supporting the result. The region achieved growth in both halves through both direct and indirect (including managed service providers) channels. Asia Pacific added 10 new customers over the course of the year. Americas revenue of US$28.1 million, was up 2% over the prior year. The region was off to a slow start with first half revenues flat against 1H 2022. There was modest improvement in the second half, resulting in aggregate revenue growth. The Americas added 14 new customers over the year. Europe revenue of £5.8 million, was up 10% over the prior year. Europe first half revenues were up 16% in the first half and down 2% in the second half. Europe added no new customers over the course of the year. Expenses The following table presents the Company’s cost base compared to the preceding year: In thousands of AUD 2023 2022 % Change Product and technology expenses 23,695 22,767 4% Sales, professional services and marketing expenses 40,892 41,136 (1%) General and administration expenses 6,312 6,241 1% Impairment expenses 31,778 – – Total expenses 102,677 70,144 46% Total expenses were up 46% to $102.7 million. The significant uplift in expense was primarily a result of a $31.8 million impairment of goodwill and intangible assets as the company performed its Cash Generating Unit valuation with updated forecasts reflecting historical trends for new business, renewals and expense growth. The Company experienced wage pressure during the year, with the demand for key talent such as software engineers intensifying. The increase in wage costs has mostly been offset by a reduction in staff numbers over the course of the year. Total staff numbers finished the year at 175 (2022: 202). Gross spending on product and technology expenditure represents 30% of total revenue (2022: 38%): In thousands of AUD 2023 2022 % Change Gross product and technology spending 20,882 23,847 (12%) Capitalisation of development expenses (7,479) (11,499) (35%) Amortisation of capitalised expenses 10,292 10,419 (1%) Net product and technology expenses 23,695 22,767 4% 30% 38% Gross spend as a % of revenue 12 Integrated Research Limited Directors’ Report Shareholder returns Returns to shareholders were as follows: 2023 2022 2021 ($29,226) $1,545 $7,935 (16.90) 0.90 4.61 Dividends per share Nil Nil Nil Dividend franking percentage N/A N/A N/A (40%) 2% 10% 2023 2022 Cash and cash equivalents (current) 18,553 12,329 Trade and other receivables (current and non-current) 63,453 68,807 – 31,309 Deferred Revenue (current and non-current) 14,082 14,625 Equity 59,874 87,113 Net (loss)/profit ($’000) Basic EPS (cents) Return on equity Financial position The following table presents key items from the consolidated statement of financial position: In thousands of AUD Assets Intangible assets (non-current) Liabilities The Company’s end of year net cash position was $18.6 million (2022: $12.3 million), with no borrowings (2022: nil). The decrease in trade receivables and deferred revenue is the result of improved collection during the year. The impairment resulted in an asset write down of $31.8 million for the period. This reflects that while the Company has a strong position in on-premise solutions, the evolving SaaS market has significantly curtailed forecast future use cases. The consolidated statement of financial position presented on page 39 together with the accompanying notes provides further details. Annual Report 2023 13 Strategy and Priorities Post pandemic our core markets of Collaborate and Transact are continuing to evolve, with the structural market changes of remote working and cashless payments having redefined our customers’ infrastructure. This presents a changing landscape for IR to respond to, as large enterprises who are the core of our customer base, make strategic decisions around on-premise, hybrid and SaaS infrastructure. A core focus in FY23 was repairing our previously strong key business fundamentals. We made good progress while keeping an eye on our cash balance, with the intention of driving the business forward in a sustainable way. We have strengthened our foundation in this regard – launched new products and re-aligned key personnel to improve our execution. During 2024 our key priorities include: Our balance sheet has no debt and a healthy cash balance. – Continuing the Americas and Europe growth through improved sales discipline; – Launch of commercially viable customer driven solutions for near term opportunities; and – Retaining a strong balance sheet and reset the operating cost base. We make the following observations regarding the current trading year: The material risks to delivery on our priorities are: – Customer sentiment appears to have normalised to pre-COVID levels. Customer budgets are not presently impacted by current economic conditions, reinforcing cautious optimism around business growth; – Renewals book to exceed the prior year and to be weighted towards H2 FY24. Renewals skewed towards Collaborate clients; – Collaborate churn expected to persist as clients migrate to a full SaaS environment; – Current new business & upsell pipeline flat on pcp, weighted to Collaborate. Focus on targeting larger enterprise customers across all products and geographies; – TCV growth expected in all geographic regions, with stronger growth in the Americas and Europe. Asia Pacific growth to moderate; and – Year-end cash balance expected to be higher, assisted by increased sales, reset cost base, and focused receivables collections program. – Vendors enhancing their in-built tools to narrow the competitive advantage of the IR offer; – Changing customer requirements, particularly a move to more homogeneous environments; – Inflationary cost pressures both in the IR supply chain (wages growth, supplier price increases), and for customers resulting in an increase in competitive pricing in renewals and new business; – Sales capability given the tight labour market, highly technical skillset and time to productivity to effectively build a pipeline of opportunities and convert these to commercial deals; and – Product capability, given the tight labour market, highly technical skillset and time to productivity to ensure our product offering and value proposition are relevant in the market. 14 Integrated Research Limited Directors’ Report Directors The Directors of the Company at any time during or since the end of the financial year are listed below: Peter Lloyd John Ruthven Cathy Aston MAICD B.Ed, MAICD B.Ec, M. Comm, SF Fin, GAICD Independent Non-Executive Director and Chairman Managing Director and Chief Executive Officer Independent Non-Executive Director Peter was appointed Director in July 2010 and elected Chairman in March 2021. He has over 40 years’ experience on computing technology, having worked for both computer hardware and software providers. For the past 35 years, Peter has been specifically involved in the provision of payments solutions for banks and financial institutions. He is currently the proprietor of The Grayrock Group Pty Ltd, a management consultancy company focusing on the payments industry. Peter is a Non-Executive Director of privately held Taggle Pty Ltd. Peter’s current term will expire no later than the close of the 2025 Annual General Meeting. John joined IR in July 2019 as the Company’s Chief Executive Officer and was appointed as Director in September 2019. Mr Ruthven is an internationally experienced software industry executive respected for his strategic approach and operational expertise across global enterprises. Mr Ruthven has over 20 years’ experience working in the technology industry with a proven track record of leadership and delivering strong profitable growth. Cathy was appointed a Director in April 2022. She is a seasoned professional with over 25 years’ experience across diverse sectors which include technology, financial services, superannuation, government, marketing services and digital business. Cathy also has senior executive experience with entities in Australia and Asia Pacific region. Ms. Aston is currently Chair of IMB Bank and a non-executive director of IVE Group and Macquarie Investment Management, and was previously a non-executive director of Virtus Health (ASX:VRT), Over The Wire Holdings (ASX:OTW), Southern Phone and the Financial Institute of Australasia (FINSIA). In addition, Ms. Aston has experience as Chair of Audit & Risk Committees for several local and overseas organizations. Cathy previously worked in the telecommunications industry and had roles with Telstra Corporation, Telstra International (Hong Kong and New Delhi) and Mobitel Private Limited (Sri Lanka). Cathy’s current term will expire no later than the close of the 2025 Annual General Meeting. Listed company Directorships held in the past three years other than listed above: None. Most recently, Mr Ruthven was the Operating Officer – Global Sales at TechnologyOne. Prior to that he was President & Managing Director ANZ of SAP, SVP International Sales at Zuora Inc, and held various senior positions at CA Technologies and Computer Associates Inc. John has extensive international experience in the USA, Europe and Asia Pacific regions. Listed company Directorships held in the past three years other than listed above: None. Cathy is currently Chair of Integrated Research’s Audit & Risk Committee. Listed company Directorships held in the past three years other than listed above: None. Annual Report 2023 Allan Brackin Anne Myers James Scott BAppSc MBA, FAICD Independent Non-Executive Director Independent Non-Executive Director BEng Hons, GAICD, FIEAust CPEng EngExec Allan was appointed a Director in February 2021. He is a seasoned non-executive Director with entrepreneurial flair and over 35 years’ experience in the technology sector. He has a proven track record as a business builder and advisor, with experience in business strategy, sales and marketing, process reengineering, change management, financial management, M&A activity and governance. Allan is the former founder and CEO of AAG Technology Services, CEO and Managing Director of Volante Group Ltd, previously Chair of RPM Global Ltd, Chair of Opticomm Ltd, Chair of GBST Ltd, Chair of Sensera Limited and is currently a Non-Executive Director of ASX listed 3P Learning Limited. Mr. Brackin has also worked with companies in the private sector and several not-for-profits in the capacities of Chair, Advisory Board member and/or Non-Executive Director. Allan’s current term will expire no later than the close of the 2024 Annual General Meeting. Anne was appointed a Director in July 2018. Ms. Myers has worked in the finance and technology industry for over 30 years with experience in business strategy, technology, digital innovation and operational functions. Anne is the former Chief Operating Officer and CIO of ING Direct Australia and has also acted in executive technology and business roles for QBE, Macquarie Bank and St George Bank. She is currently a Director of both Defence Bank Limited and United Way Australia Limited and has previously been a Council Member of the University of New England. Ms. Myers has also worked in the notfor-profit sector as CEO of United Way Australia, and was a member of the Industry Advisory Network for the University of Technology. Anne’s current term will expire no later than the close of the 2023 Annual General Meeting. Allan is currently Chair of Integrated Research’s Nomination & Remuneration Committee. Listed company Directorships held in the past three years other than listed above: None. Anne is currently Chair of Integrated Research’s Technology & Innovation Committee. During part of 2022, Anne was Chair of Integrated Research’s Audit & Risk Committee. Listed company Directorships held in the past three years other than listed above: None. 15 Independent Non-Executive Director James was appointed a Director in May 2021. He is a seasoned professional with over 26 years’ experience in media and technology sector with industry and advisory businesses at a local and international level. Mr. Scott is currently an operational advisor to private equity firm, Liverpool Partners, a non-executive director of Boom Logistics (ASX:BOL), nonexecutive director of Orbx Pty Ltd, Chair of MerchantWise Group Pty Ltd, Chair of Seisma Pty Ltd, and Chair of Simplyai Pty Ltd, and was previously non-executive Chair of data & analytics business, Skyfii (ASX:SKF). James was previously Managing Director of Accenture Digital, a Partner in KPMG’s Advisory division and was the Chief Operating Officer of Seven Group Holdings (ASX:SVW). Mr. Scott was a founder and director of Imagine Broadband Limited and was a Director of WesTrac and Coates Hire during his time with Seven Group Holdings. James’s current term will expire no later than the close of the 2024 Annual General Meeting. Listed company Directorships held in the past three years other than listed above: No