There are three elephants in the room with IRI. Firstly how will...

There are three elephants in the room with IRI.

Firstly how will IRI adapt to the trend for more business activity to be conducted in the cloud.
Secondly why has the contract renewal process been so badly hit and will it recover.
Thirdly is CEO John Ruthven the right person to restore IRI to leadership in the IT diagnostic space.

For context I am now down 30.7% on my IRI investment which I accumulated over Nov/Dec 2020. This is probably the worst new investment performance in my portfolio ever. I must say I am shocked at such a rapid decline. I read in a post above a HC poster equating this with ISD Isentia. I think it is completely different with Isentia having a small number of large clients with large individual contracts whereas IRI has a large number of large clients with quite small contracts.

The only positive I can see coming out of the current sales shortfall is that the current method of allocating contracts won to current revenue even for multi year contracts has highlighted the problem immediately. If all of IRI contracts were SaaS contracts the sales shortfall would have been obscured to some extent due to the recognising of revenue over the life of each contract.

As early as 2018 results announcements IRI indicated that they were looking to enhance its offering for cloud based equivalent products. So there is a lot of surprise amongst investors today that IRI seems to be behind in its quest to be 'Cloud Ready'
One of the issues, which is fixable, is that IRI have invested a lot of money developing its on premise products and built up an enviable R&D team in the process. The skills to deliver equivalent products for the cloud environment are different and somewhat harder to find.
A quick read through employee/employer evaluation site Glass Door gives a little hint of this at perhaps some resistance to change and CEO John Ruthven has alluded to this as well. Given the reputation of excellence IRI has built up withits on prmise products I see this problem will be overcome.

We now know that IRI has some cloud products ready for deployment and others are close to release. Given the pedigree of past products there is no reason to think these products will be any less robust once in operation. The pity is the delay in development has been magnified by the restrictions that Covid-19 has placed on business activity especially gettings to commit to rolling over contracts or taking on new contracts.

IRI thrives in the customers where there are systems complexity and where it is crucial to maintain systems up time and that problems can be diagnosed in real time and at a granular level. The push into cloud computing will not nevcessarily reduce complexity. It is designed to reduce cost and make systems more available to employees no matter where they work.

CEO John Ruthven and CFO Peter Adams both conceed that customers moving into the cloud will tend to use the diagnostic tools that are native (already embedded) into the software they are using. These native tools are generally not as sophisticated or as capable of low level granularity as the IRI product suite.

It is the contention of Ruthven and Adams that customers will, after a time, want to return to the better tools that IRI presents. Investors could think of it like a set of waves at the beach. The best waves in the set are generally not the first wave. IRI wants to be the second wave where it can demonstrate it has the best diagnostic tools for the complex environments and where IRI can maximise its revenues.
The second wave could be as early as 12 months after a customer implements the cloud.

Much of the IRI contract winning and contract renewal process is conducted face to face. That is just how they do IT person to IT person. Covid-19 ruined that approch to business for most of 2020. This can be seen in the various waterfall charts IRI has produced showing contracts not renewed, contracts deferred and contracts shortened. A perfect storm for IRI. It is however somewhat disappointing that the forecasting of this deterioration was so late and quite large. There is no doubt that the forecasting process broke down. This can be fixed with a bit more application and some more discipline from the CFO.

John Ruthven is a 10 year veteran of TNE and in his final role there was responsible for global sales. TNE is one of Australia's success stories in the technology sector. So the sales pedigree of Ruthven is without question. That the contract process in IRI seems to have broken down is a surprise. Ruthven has taken a range of actions to immediately turn this around and I am sure we will see lots of announcements of contract wins and renewals between now and the end of 2021.

My only concern, and it is a watching brief is that this is Ruthven's first CEO role. He is certainly on notice however I believe his TNE experience will stand him in very good stead.

In conclusion I am going to hold. I will not be adding to my position. Fundamentally the company has previously demonstrated it has the attributes of a good company. Cash is not a problem as IRI has a good cashflow from existing contracts. My belief is that the company is now transitioning to the cloud and that the difficulties of 2020 can be regarded as timing issues and not evidence of structural problems.

If an investor is a IRI true believer then this is a fabulous buying opportunity.