IntelliHR (ASX:IHR) Spouts Optimism In Its FY 2021 Results

As I’ve discussed previously, IntelliHR (ASX:IHR) is a fast growing software as a service company offering competitively priced HR software for monitoring and managing the employee lifecycle. You can read why I bought IntelliHR shares here and my see notes on its recent strong quarterly report here.

Since IntelliHR reports quarterly, much of the key data for FY 2021 was already public, so I won’t rehash the cashflows, Annualised Recurring Revenue, or customer numbers here. However, what I will say is that the revenue growth of 97% to almost $2.5 million supports the contention that the company roughly doubled in the last year. In this piece, I’ll focus on some of the new information we’ve received.

First of all, the way the company is selling its products is changing. The report said that the “eco-system development is paying dividends with over 80% of the conversions in Q4 FY2021 having an eco-system partnership focus.” We don’t know what that means exactly, but it certainly means that reselling agreements and integrations are seen as an important way of increasing sales.

This is none more evident than in the much heralded reseller agreement with payroll provider Cintra, which IntelliHR says has the potential to bring on up to $8m in annualised recurring revenue “subject to successful roll out which is expected to gain significant momentum in H2 FY2022.” Given ARR currently sits just under $4m, that would be a huge gain.

On a conference call to discuss the results, the CEO of IntelliHR, Rob Bromage, said that, “They are going to put Intelli and Cintra together as a package called Cintra Plus.” The idea, here, is that Cintra will do the some of the hard yards selling IntelliHR. The CEO explained to me that Cintra customer will be able to see areas and functionality of the IntelliHR platform that they don’t have, and we are able to direct them to enquire about an upgrade.” It remains to be seen whether this product placement, will see the Cintra sales team close deals at a rate that is pleasing for IntelliHR shareholders.

However, it’s not clear to me that IntelliHR always has a great relationship with payroll providers, since I understand that ADP charges users to integrate with IntelliHR. Going foward, there’s a lot to be said for trying to join the ecosystem of payroll providers rather than competing with them. Although this means you’ll always need them more than they need you, it can supercharge growth. In any event, the reseller deals are only part of the go-to-market strategy which consists of direct sales teams, reseller deals, and ecosystem partners. The company says “Whilst direct sales remain our strongest channel, we are encouraged to see our technology ecosystem partners positively influencing an increasing proportion of these deals.” I’m not entirely sure who these partners are, though I’m guessing Xero is one. In any event, it’s worth remembering that one of IntelliHR’s key selling points is that it is cheaper than some of its larger competitors, while it still offers similar functionality.

On the same call, the Chariman of the IntelliHR Board Tony Bellas mentioned that the workforce is young, with the average age of 28, and, having built the software themselves over the last few years “have got the experience under their belt and know what they are doing.” It’s always hard to know how well software development teams are functioning, but it certainly checks out that, for its age, IntelliHR has a fairly long-serving, young, software development team. I have multiple times seen small groups of software developers create hundreds of millions in value when they are kept together for 10 years or more, but it takes luck and skill to get a team like that. The company does not seem to have cultivated its presence on Glassdoor (which is a good sign, since it means it’s less likely to be gamed by management) and all three reviews are positive.

In terms of product development, it seems the focus will be integrations, as the company has just launched its own marketplace for other apps (like Xero) it can integrate with. In terms of the user experience, the CEO said, “We’re going to gamify skills attainment on the platform.” I’m not quite sure what that means but I guess it will include things like rankings and badges. I’m not sure how popular that sort of thing is with actual users but as long as it contributes to an HR goal, such as keeping track of relevant qualifications, then it may work well. Certainly, gamification is a strategy that is often effective at increasing user engagement.

While it’s too early in the company’s journey to get very excited about the retention rate, it’s good to see that the company reported” less than 0.5% of revenue lost in the last 12 months.” High retention rates are a key input to the lifetime value of the customer base. At present, the company chooses to calculate lifetime value based on an average lifetime of 15 years, which gives them about $50m in total customer lifetime value. It’s not clear what the true average customer lifetime will be, so I take all this with a grain of salt. If you don’t quite follow this paragraph, or if you simply want to hear more about the unit economics of IntelliHR, I had a more in depth discussion about IntelliHR’s Software as a service stock metrics in this Shares for Beginners with Phil Muscatello.

Please remember that these are personal reflections about a stock by author. I own shares in IntelliHR. This article should not form the basis of an investment decision. It is an investment diary valuable only for the cognitive process it demonstrates. We do not provide financial advice, and any commentary is general in nature. Please read our disclaimer.

Are IntelliHR (ASX: IHR) Shares Good Value?

At the current price of 31 cents per share, IntelliHR (ASX:IHR) has a market capitalisation of about $88 million. It lost $7.6 million during the year and burnt through just under $5m of cash. It has cash of about $4.1 million so it is almost certain to raise capital again soon. At about 22x ARR, IntelliHR would appear to be very expensive.

That said, it’s reasonable enough to expect that it could easily get to about $10 million ARR within a couple of years, if its current sales momentum doesn’t fade too quickly. IntelliHR increased ARR by almost $2m in the last year. If that increases to about $2.5m in FY2022, and then $3m in FY2023, then the company would have about $9.5m in ARR with trailing twelve month growth of over 40%. If the company dilutes shareholders by 10% in that time, then we’d be looking at a market cap of around $100m or about 10.5 times ARR, at the current share price.

It’s always very difficult to forecast growth when a company is just getting going, as it’s hard to estimate how big the pool of “low hanging fruit” is and also how good the product is. I think something like what I envision above is possible, but really, anything could happen. I wish I could say I had loaded up at lower levels, but in reality, the current price is fairly close to my average buy price. And I am happy to continue to hold.

The next key event to watch will be the upcoming capital raising. I hope it will be offered fairly to all shareholders, not just to institutions and sophisticated investors, as I believe that is the only fair course of action. It will be interesting to see what price the capital raising is conducted at.

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