Many companies operating in the IT services and software industries are easily scalable, have a relatively fixed cost base and require low levels of capital. Their high degree of operating leverage means that an increasing amount of revenue from each additional customer will fall to the bottom line and boost profit – fantastic news for investors.
Going head-to-head in this fight are three quality Australian companies with global reach.
The rules: five rounds with 3 points awarded to the winner of each round, 2 points for second place and 1 point awarded to the loser. The company with the highest total point score will be declared the champion.
Integrated Research Limited (ASX: IRI) – a leading global supplier of performance management software for critical IT infrastructure. It has a market capitalisation of $445 million and operates throughout Australia, Asia, Europe and the Americas.
GBST Holdings Limited (ASX: GBT) – is similar in size to Integrated Research with a market capitalisation of $318 million. GBST provides financial software in Australia and the UK across wealth management and capital market areas.
Iress Ltd (ASX: IRE) – the share market and wealth management systems provider is the heavyweight in the bout, weighing in with a market capitalisation of $1.5 billion. Its primary operations are in Australia, Asia and the UK.
Let's get ready to rumble.
Round 1: Revenue growth
The table below shows the revenue growth including the compound annual growth rate (CAGR) for the previous three and five-year periods.
All companies boast impressive revenue growth rates, but Iress is a standout with 17.1% CAGR over the past three-year period. GBST closely edges out Integrated Research with a slightly higher three-year CAGR rate.
Integrated Research, GBST and Iress all expect solid revenue and profit growth in the coming year.
Points: Iress (3), GBST (2), Integrated Research (1)
Round 2: Debt
Debt is fine when used in moderation. However, the safest level of debt is none.
Integrated Research has used no debt financing in the past five years. GBST had about $20 million of debt in 2011 but has continually paid it down and now carries no long-term debt. Iress has around $200 million of debt on its balance sheet, giving it a debt/equity ratio = 52%.
Points: Integrated Research (3), GBST (2), Iress (1)
Round 3: Return on Invested Capital
Return on invested capital (ROIC) shows how effectively the business is using its capital (both equity and debt) to generate returns.
Integrated Research is the clear winner with its ROIC constantly around 30% and above. GBST's ROIC has been steadily improving over the past five years while Iress' $360 million acquisition of UK-based Avelo in 2013 has negatively impacted its ROIC. The huge drop in ROIC could indicate that Iress paid too much for its acquisition and investors should watch for improvements in this metric.
Points: Integrated Research (3), GBST (2), Iress (1)
Round 4: EBITDA / Invested Capital
Software businesses often have substantial non-cash depreciation and amortisation charges that may affect ratios like ROIC above. This ratio is calculated before these non-cash items affect earnings (earnings before interest, tax, depreciation and amortisation – EBITDA) and provide another view of company profitability.
This metric is similar to ROIC in the previous round, so it is no surprise that Integrated Research is the clear winner followed by GBST and Iress.
Points: Integrated Research (3), GBST (2), Iress (1)
Round 5: Value
Presented below are three common valuation ratios that can provide further insight into the relative valuation of the companies (although investors should not rely on these simple ratios alone to make investment decisions).
GBST offers the best valuation when looking at these metrics, followed by Iress while Integrated Research is the most expensive.
Points: GBST (3), Iress (2), Integrated Research (1)
Final Score:
After five rounds, we have a tie between Integrated Research and GBST Holdings! Integrated Research has a higher return on invested capital while GBST offers a more compelling valuation. These two companies should be the focus of your research if your are looking to invest in this growing sector.
