Technology One (ASX: TNE) is a Brisbane based technology company that provides enterprise SaaS solutions mainly to government councils and universities in Australia, New Zealand, and quite recently in the UK. These solutions are absolutely vital to their customers to run the daily business as usual activities. TNE’s SaaS solutions consist of products for financials, HR, payroll, supply chain and business intelligence verticals.
TNE has 539 enterprise customers on their SaaS platform and they have added 104 new customers during FY2021 – representing a 24% growth in number of customers over the previous corresponding period. Over 80% of TNE’s revenues are generated in Australia. However, the growth rate has slumped in FY2020 due to the effects of the pandemic. The UK has been the highest growing market for Technology One in the last couple of years.
In order to drive growth, R&D is a vital investment and TNE has consistently invested more and more every year. Over $480 million has been invested in R&D over the past 10 years. Significant investments have been made in the UK over the past few years as the company has worked to open up a market organically where most would rely on an M&A deal to buy their way into a market. This is a huge deal because the market in the UK is 3 times larger than that in the APAC region.
TNE is a very well managed company and we will see just how stable their finances are further down in this report. However, the stock has been exposed to a lot of volatility due to momentum trading. Investor confidence was high on technology stocks post the Covid crash in March last year, and we saw the stock rise to its 52-week high. However, the trading volumes that can be seen in the below chart shows that the stock has consistently seen high selling pressure.
Once again, the stock price surged as TNE’s FY2020 results that were released in November were positive. However, confidence wore down again as the emergence of a vaccine resulted in a rotation from technology stocks towards more cyclical stocks.
Since the financial report for FY2020, there have been no announcements that have been made that change the fundamentals that are at play for TNE. Growth rates in the short-term, especially in the UK may be impacted due to the impacts of the coronavirus. But the annual recurring revenues have been very resilient even during this time.
The stock price has dropped off so much recently that there have been a few directors topping up their positions in TNE.
Governments, government related businesses and higher education are the markets that Technology One targets, and they have delivered strong growth as SaaS adoption has been rising. Market penetration has been high in Australia and New Zealand. However, the whole APAC market has been penetrated less than 15% in each of the different verticals that TNE operates in. The UK is very nascent as well, and the market in the UK is estimated to be 3 times larger than that of APAC.
The chart below tabulates the vertical market analysis of TNE. Given that TNE’s products are sold to governments and universities, there will be a ceiling when it comes to how much growth can actually be delivered (unlike consumer SaaS products).
The prospects are still high as far as the UK and APAC are concerned. SaaS adoption among governments have increased as we move more towards the digital economy and the acceleration is forecasted to continue in the short and medium term. Universities as well are again a largely finite set and heavy education markets such as APAC and the UK will deliver growth in the coming years.
TNE recognises revenues and profits across 3 different product segments – Software, Consulting and Corporate, and all 3 have seen top line growth during a turbulent year. Software profits were up 3% on the back of SaaS growth of 32%. Consulting profit increased by 38% mainly driven by improved execution. Corporate profits increased by 29% during the year.
Annual Recurring Revenue and Churn are two very important metrics for a SaaS business. Customer churn is very low for TNE and they retain 99% of their clients. This ensures high sustainability in their revenues. The annual recurring revenue was $222 million, and estimates suggest that it will reach $500 million in the coming years.
86% of the total revenues that are generated during a year is recurring. This means that most of TNE’s revenues are locked in at the beginning of the year – ensuring stability. The UK SaaS ERP solution is nearing completion and as the business has grown, the investment has reached a breakeven point and TNE should start recognising profits going forward.
EBITDA margins have consistently increased showing the strength in operational efficiency of TNE as they scale. TNE has delivered growth in all the lines of revenues and profitability consistently and we estimate it to continue to grow. The firm has doubled its Net Profits every 5 years with a 10year CAGR of 14%. In FY2020, the net profit was up 13% at $66.1 million.
In addition to R&D investments and growth investments, TNE also pays a healthy dividend for a growth company. Dividends have increased consistently over the past 7 years. The dividend yield is 2.11% at a payout ratio of 65%. The franking is 60% due to R&D concessions and tax benefits that TNE receives.
Technology One has very low debt on its balance sheet. TNE is capitalised by debt to the extent of 17.1% and by equity up to 82.9%. They have increased their cash position to $125.2 million (by 19%) during FY2020. The total assets continue to grow as R&D is being partially capitalised. The only risk that TNE faces that puts pressure on its balance sheet is that if lease liabilities.
To summarise, the highlights of TNE are:
- 86% of their revenues are recurring.
- Net Profits have been growing at 14% CAGR for the past 10 years.
- UK business breaks even and is ready to generate profits.
- R&D investments continue to increase.
- Growth will mainly be driven by the UK and APAC region.
- Dividends have been constantly increasing.
- Strong balance sheet with healthy cash position
Technology One is an exceptionally stable business. Their financials look strong and their balance sheet shows good financial health. The growth story is mainly being led by the UK market and significant investments are being made towards R&D. We expect the company to continue to grow its revenues, profits, and dividends. TNE is a “Buy” recommendation to long-term investors.