Treasure Chest: TechnologyOne’s Transition

This story features TECHNOLOGY ONE LIMITED. For more info SHARE ANALYSIS: TNE

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Today's idea is on TechnologyOne.

Whose Idea Is It?

Bell Potter's

The subject:

Bell Potter upgrades TechnologyOne ((TNE)) to Buy, ahead of the upcoming release of interim financials.

More info:

TechnologyOne provides business solutions software. For several years, the company has been transitioning its software-as-a-service (SaaS) customers from on-premises enterprise resource planning (ERP) to SaaS ERP on its data centre.

In other words, customers have been transitioning from running TechnologyOne’s software on their own in-house IT systems to running it in the cloud, allowing internet access. For this, notes Bell Potter, transitioned customers are now paying twice as much as they were before.

The broker refers to this process as “SaaS flips”.

When TechnologyOne reported its FY23 result back in November brokers were impressed with strong revenue growth, albeit this was offset by the company pulling forward expenses related to due diligence costs for an acquisition that did not go ahead, and management decided to book those against said strong revenues.

Not that this much bothered brokers at the time. The highlight of the result was management bringing forward its FY26 target of $500m in annual recurring revenue to FY25, given stronger-than-expected customer adoption and a robust sales pipeline.

Management also reiterated its long-term goal to double earnings and revenues every five years.

In the wake of the result, one broker monitored daily by FNArena – Ord Minnett – retained its Lighten rating, five retained Hold or equivalent ratings, and one downgraded to Hold from Buy; all based on a valuation that was seen as fair.

The one downgrade came from Bell Potter.

This morning Bell Potter upgraded back to Buy.

A key focus in TechnologyOne’s upcoming first half FY24 result in May will be the company’s net revenue retention, Bell Potter suggests, as this will be the first result in a few years in which the figure has not been boosted by significant SaaS flips.

The NRR in each of the last two years has been in excess of 115% which is strong and above the industry average, the broker notes, but a reasonable portion of the average additional revenue per customer has been generated through SaaS flips.

Yet SaaS flips were largely completed by the end of FY23, and thus will provide little boost to NRR in FY24, hence the big question is whether TechnologyOne can maintain an NRR of around 115% or more without these flips.

Bell Potter’s view is that it can, through a combination of other drivers, and such an outcome in the first half and beyond would be well received by the market, the broker believes, given it implies or suggests the outlook remains positive and the company can indeed double revenue every five years or so via organic growth alone.

Bell Potter has lifted its target price to $18.50 from $17.25, which takes the consensus target among FNArena brokers to $16.07 from $15.89. The new consensus target remains below the share price, with a closer look into the finer details revealing two out of seven brokers making up FNArena's consensus carrying much lower targets, effectively weighing down the average.

All other price targets are at or above today's share price, though none as high as Bell Potter's updated target. All would be keenly awaiting the release of interim financials, scheduled for 21 May 2024, to update their assumptions and modeling.

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