Technology One (ASX: TNE) is one of Australia’s largest enterprise SaaS companies that has delivered modest returns despite the market turmoil. TNE’s customers are mostly government councils and universities in Australia, New Zealand, and recently in the UK. TNE’s SaaS solutions consist of products for financials, HR, payroll, supply chain and business intelligence verticals. These solutions are vital to their customers to run the daily business as usual activities.
Technology One provides an all-in-one enterprise software system rather than specialising in particular areas. It also markets the software on its own and takes sole responsibility for installing and supporting it, which is a strong selling point for customers that want a set-and-forget system. Therefore, TNE’s user base is extremely sticky as migration to other products is expensive and a strenuous task. This has helped protect TNE in a volatile market.
TNE shares currently trade around the $10.55 mark, following yesterday’s stock market rout that wiped over $100 billion from the ASX. Our earlier recommendations to members were TNE shares at $7.83 and $9.44 a share. Currently, TNE has returned over 34%. Despite the volatility, TNE shares are trading in the green, returning 17% in the past year and 3% in the past month.
There are 4 reasons why TNE shares have avoided the broad market volatility relatively better than most companies:
- The extremely sticky userbase ensures stability in cashflows.
- TNE operates with high gross profit margins of about 55% – minimising the effect of inflation on its costs.
- Inflation costs are easily passed on to its customers
- TNE is viewed as a defensive technology stock that is fairly recession-proof by investors.
TNE is associated with consistent growth over the past few years. The ongoing success has been underpinned by the incredible growth of the SaaS business, which doubles in size every 18 months. This is powering the growth of TechnologyOne, which continues to double in size every five years.
As of the beginning of FY22, the company has 637 customers on its global SaaS ERP solution. The solution is a clear market leader because TNE is the only enterprise vendor to offer a true SaaS ERP solution across the entire enterprise.
Unlike many other software providers that use cloud hosting, TNE owns, builds and supports its software. Because other providers handcraft each customer’s environment, they cannot offer similar shared benefits or economies of scale.
TNE targets $500m+ ARR by FY26
TechnologyOne is focused and clearly on track to achieve its strategic goal of reaching $500 million+ Annual Recurring Revenue (ARR) by 2026. To achieve this, the company is focused on several platforms for growth:
- Driving the growth of its customer base
- Expanding within their vertical markets
- Expanding product range and depth
- Growth in the UK and beyond
TNE sees the UK as a significant growth area, demonstrated by the increased success they have already seen in that region over the last five years.
Driving growth of Customer Base
As an established company with 34 years of success, TNE benefits from the investment of more than 1,200+ customers. The company thus has deep relationships and industry knowledge to power its success and bring new customers to TechnologyOne. They focus and specialise in six large vertical markets, enabling them to build deep industry knowledge and develop pre-configured solutions that quickly meet customers’ needs.
There is a significant runway for TNE to expand its customer base across all markets, grow its solution footprint, and add customer value. This growth is supported by the vertical alignment of TNE’s Marketing, Sales, Product and Consulting teams. It is a testament to the deep industry knowledge and expertise that they have developed in-house across these fields.
Expanding within Vertical Markets
TNE has experienced continued success and expansion within each of its vertical markets. Adopting their global SaaS ERP has also enabled the firm to further penetrate its key vertical markets.
By driving the adoption of its global SaaS ERP, TechnologyOne has made the transition to its SaaS solution simple and seamless for its on-premise customers. They can now move to SaaS in weeks, not years, like those using TNE’s competitors’ products. By transitioning to SaaS, the on-premise customers will unlock the significant benefits that SaaS customers already receive.
During the year, TNE announced the end of its on-premise business by October 2024. This watershed milestone gives its remaining on-premise customers ample time to transition to the global SaaS ERP solution. The expectation is that 90%+ of all TNE remaining on-premise customers will move to their SaaS solution, driving the growth of the SaaS business.
Increasing adoption of their products, TNE’s global SaaS ERP solution comprises 15 products (with the recent acquisition of Scientia) and up to 30 modules per product, delivering the deepest functionality for the markets that they serve. The solutions are modular by design, providing customers with the flexibility to add new products as their needs increase.
TNE is constantly enhancing the functionality of its products and delivering innovations for the benefit of its customers. This has been key to TNE’s 99% customer retention and continued growth over the last 34 years.
Expanding product range and depth
TNE works closely with its customers to ensure they understand its needs, which then helps the firm drive continuous improvement and provide an increasing range of functions within its enterprise solutions. The result of all the R&D is that TNE continues to extend its product offering by developing additional features and functions – further building on what is already one of the world’s most comprehensive enterprise software suites.
TNE is extending the reach of its software from the back-office power users such as accountants, payroll clerks, student administration and customer service teams to the front office end-users such as employees, ratepayers and students, making the power of ERP available to everyone.
Support Experience has been key to TNE’s sticky userbase. Sales, Marketing and Customer Success teams are always on top of their customer needs and keep tabs on the various accounts the company has built. This enables TNE to leverage its partnership approach.
Growth in the UK and beyond
We see the UK as a significant growth area, demonstrated by the increased success TNE has already seen in that region over the last five years. In FY21, TNE built on their break-even status, with SaaS ARR of $9m, up 20%.
TNE has been working on the localisation of our global SaaS ERP solution to ensure that they deliver a solution that fits the specific needs and requirements of the industries in the UK. This year, TNE achieved a major milestone, completing the localisation of their Student Management product, which opens up significant opportunities for growth in Higher Education.
TNE also made their first international acquisition of leading Higher Education software provider Scientia, adding a world-class enterprise scheduling and timetabling product to our OneEducation SaaS ERP solution. This acquisition supports TNE’s strategic focus to deliver the deepest functionality for Higher Education and accelerate growth and competitive position in the UK.
Technology One said at the end of their FY21 results that they would also look to enter the lucrative US market in the future.
Last month, TNE reported its 1H22 results – making headlines and delivering a 44% growth in ARR and 18% growth in NPAT. TNE has managed to accelerate its growth at a time when most tech companies are finding it hard to hold on to any growth trajectory. The result made it the 13th year of record first-half profit for TNE. Key highlights were:
- Profit After-tax of $33.2m, up 18%
- Profit Before tax of $42.6m, up 14%
- SaaS Annual Recurring Revenue (ARR) 1 of $225.1m, up 44%
- Revenue from our SaaS and Continuing Business of $169.5m, up 21%
- Total Revenue of $172.5m, up 19%
- Expenses of $129.9m, up 21%
- Cash and Cash Equivalents of $116.4m, up 16% from 31 March 2021
- Cash Flow Generation2 of $1.6m as expected, and will be strong over the full year
- Interim Dividend of 4.2cps, up 10%
- R&D expenditure (before capitalisation) of $41.5m, up 20%, which is 24% of Revenue
- UK profit up 100%+
TNE’s SaaS business continues to grow strongly. The firm’s ARR is backed up by an increase in the number of large-scale enterprise SaaS customers by 24% to 714.
There was an acceleration of customers moving to TNE’s global SaaS ERP solution, with more than 138 large enterprise customers making the shift, the highest number to date for any comparable period. This was driven by TNE’s ‘end of on-premise program’, with the majority of remaining on-premise customers now also committing to transition before 2024.
The global SaaS ERP is the future of enterprise software. It provides our enterprise customers with a mission-critical solution to run their entire business on any device, anywhere, at any time. It also allows them to innovate and meet the challenges ahead with greater agility and speed without worrying about underlying technologies. This makes life simple for them and is the biggest reason why TNE is highly confident of migrating over 90% of its customers to SaaS.
These are strong half-year results for TechnologyOne and validate the strength of its SaaS strategy, which continues its strong growth trajectory in Australia and the UK. TNE has also had many strong wins and organic growth during the period. Nineteen large-scale enterprise customers partnered with TNE in the first half, including Shire of Mornington Peninsula and City of Manningham in Australia, Gisborne District Council and Ministry of Justice in New Zealand and Newport City Council Derby City Council and Royal Conservatoire of Scotland in the UK.
TechnologyOne’s UK business has continued to flourish, with profit before tax of $2.3m for the half-year, up 100%+. Mr Chung, TechnologyOne’s CEO, said the company sees significant growth opportunities in the coming years. TechnologyOne is on track to deliver continuing strong growth over the full year in the UK. The total addressable market in the UK is 3 times its APAC addressable market.
For the period, expenses including Scientia (first full half-year) were up 21% as expected. Expenses excluding Scientia were up 13%. Mr Chung said he expects revenue growth and expense growth to align over the full year. As TNE continues to win more customers and their SaaS Platform continues to scale globally, the profit margin will continue to expand given the economies of scale benefit that SaaS business models possess.
TechnologyOne also announced significant R&D investment in extending the functionality and capabilities of the company’s global SaaS ERP solution, including a new Local Government – Digital Experience Platform (LG DXP).
LG DXP is set to revolutionise how residents interact with councils. The initial feedback from TNE’s group of early adopters has been excellent, and it is believed that the DXP strategy will create an additional long-term platform for future growth.
Traditionally, cash flow generation for TechnologyOne is weighted to the second half, aligned with customer payment anniversary dates, resulting in negative cash flow in the first half. TNE delivered a break-even cash flow generation result this half-year, with cash and cash equivalents up 16%. Cash flow generation will be strong over the full year, and we expect it to represent approximately 85% of net profit after tax. Cash flow generation will progressively align to NPAT by FY24.
The results are due to the continuing strong demand for TNE’s global SaaS ERP solution. Today, 97%+ of TNE’s Revenue comes from our SaaS and Continuing Business. This is quite an achievement for the company to have transitioned from a traditional on-premise company to a SaaS company over the last 5+ years.
TechnologyOne has consistently increased its dividends by 10%. In light of the company’s strong results, the Dividend for the half-year was increased to 4.2 cents per share, up 10% from the prior year.
TechnologyOne is one of the few companies that provided a guidance for full-year earnings. The company is well-positioned to deliver continuing strong growth over the full year, expecting Net Profit Before Tax growth for FY22 up 10% to 15% in FY21.
TNE expects to see its SaaS ARR continuing to grow strongly, up more than 40%+ over the full year. While inflation and interest rate hikes pose a threat, TNE is well-positioned to ride out the storm due to the below reasons:
- The markets TNE serves, such as local government, higher education and government, are resilient,
- TechnologyOne provides mission-critical software with deep functionality for these markets,
- In times like this, these customers turn to ERP software to achieve greater efficiencies in their business. They save 30%+ by using TNE’s global SaaS ERP,
- TNE’s subscription revenue contracts pass on inflation,
- TNE continues to benefit from improving margins because of the significant economies of scale from its single instance global SaaS ERP solution.
As TNE continues to grow its SaaS business aggressively, the company will continue to reduce its legacy licence fee business, which will be down to approximately $12m over the full year (v $18m pcp). While this has a significant immediate impact on TNE’s P&L over the full year, this is an integral part of the company’s strategy to grow its SaaS business and the recurring revenue base.
The long-term outlook is thus looking very positive. Over the next few years, TNE’s SaaS and Continuing Business is expected to grow strongly as the legacy licence fee business ends. TNE is on track to deliver a Total ARR of $500m+ by FY26, from its current base of $288m. The economies of scale from our global SaaS ERP solution will also see continuing Profit Before Tax margin expansion to 35%.
TNE’s revenues and earnings projections show a steadily increasing upward trajectory – a fantastic trait to have during uncertain times such as now. We expect margins to expand gradually, as we have outlined throughout this report, ultimately increasing cashflows. TNE will thus be able to continue growing its business and dividends by 10% year-on-year, a very healthy mix for long-term investors.
Balance Sheet & Cash Flow Remain Robust
The Balance Sheet of TNE is bulletproof. TNE has increased its cash reserves by 16% to $116.4 million. TNE does not have any debt on its balance sheet. Net Assets have increased 29% to $197.8 million.
TNE began capitalising on R&D costs in FY19, and therefore, it has temporarily impacted cash flow generation. In FY22, full-year cash flow generation is expected to be 85% – 90% of NPAT. This has already been priced into TNE. As capitalisation and amortisation closely align, full-year cash flow generation will progressively grow to match NPAT again in FY24 onwards.
Our earlier report can be accessed by clicking here.
TechnologyOne is a robust business that has been consistently growing year on year. Its enterprise SaaS solution is a product that can pass on any inflationary costs to its customers. Moreover, TNE’s customers are the government sector, higher education, healthcare, etc. – all resilient to economic downturns. This coupled with the fact that TNE’s product enables its customers to reduce their costs, the company is expected to continue growing. TNE boasts a 99% retention rate across all markets of operation, and the company is on track to hit its FY26 goals that we have detailed in this report. We recommend investors to “Hold” positions.