Readytech is ready for the big time

Originally written for Livewire

On Tuesday Readytech (RDY) the provider of software for the education, workforce and government and justice industries reported the company’s financial year 2023 results. The results were largely in line with expectations and painted a picture of continued growth across verticals, improving profit margins and increasing leverage.

Total revenue increased 32% for the year, capping a three-year period in which the company grew at a compound annual growth rate of 34%. But more importantly, organic growth, excluding the acquisition of government software business IT Vision last year, was up 13%. This continues the company’s strong organic growth driven by higher prices, selling more software modules to existing customers and adding new clients. Revenues are volatile and products perform critical functions for clients. Very few customers turn off products and stop paying.

New client wins, particularly in the larger “enterprise” customer space, were strong. Among the 11 new corporate clients, $12.4 million of work was signed, with total contract values ​​far exceeding that number over time. This included customers such as Auckland Council and Nando’s. The company is also competing for $28 million in new work.

Profit margins, for Readytech as measured by earnings before interest, taxes, depreciation and amortization, fell during the year, hampered by lower margins from the IT Vision acquisition. There is some evidence that the business has bottomed marginally.

Profit margins in the second half improved from the first half (although seasonality may have played a role). IT Vision’s profit margins jumped to print 27% in the second half, a full five percent better than its full-year margin. And the company forecast an improvement in profit margins next year of just under one percent, with longer-term targets for another three percent better.

The only blight was that technology spending was high and most of the spending was added to the balance sheet rather than costs. Total capital expenditures rose 56% over the previous year, outpacing revenue growth. Management suggests some relief here as well, with technology spending as a share of revenue declining next year and falling again over the long term.

If all goes according to target, management will have profit margins in the “high 30%” range by 2026, with technology spending at 12-13% of revenue. That would be good enough to sink about $25 million in free cash flow into the business, a very attractive 7% free cash flow yield at today’s price, while still growing healthily.

With increasing predictable revenue and a clearer line on cash costs, Readytech is poised to break into the big leagues of Australian technology companies.

Readytech continues to be one of the largest investments in the Forager Australian Shares Fund (FOR).

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