TechnologyOne: The ‘Beat’ Goes On

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Management at TechnologyOne raised FY25 profit guidance after delivering record interim metrics, but analysts suspect there’s more growth on offer.

-Record interim financial metrics for TechnologyOne
-FY25 profit guidance raised, SaaS-Plus accelerating in the UK
-Company is now beating Oracle and SAP on their turf
-Valuation, as per always, subject to debate

By Mark Woodruff 

For the sixteenth consecutive year, enterprise resource planning software provider TechnologyOne ((TNE)) has delivered record interim profit, revenue, and software-as-a-service (SaaS) fees, beating analysts’ forecasts. Management also raised FY25 profit guidance, re-inforcing the company’s strong momentum.

What underpins this company’s remarkable consistency? One key factor is TechnologyOne’s diversified revenue base across regions, products, and verticals, alongside a growing share of recurring revenues.

During the results presentation, management re-iterated its confidence in maintaining robust and consistent growth, supported by the company’s high-quality earnings mix.

Management believes TechnologyOne possesses a “game changing” SaaS-Plus offering, combining vertical-specific and mission critical SaaS ERP and implementation, with the fastest implementation times in the industry.

SaaS and recurring revenues now represent 91% of total operating revenue, note analysts at Wilsons, significantly enhancing earnings quality and visibility.

Equity prices generally follow financial metric outperformance, and TechnologyOne shares have continued their inexorable climb, closing at $38 yesterday, up from $15 at the beginning of 2024, prompting some brokers to express valuation concerns.

Guidance

Pre-tax profit (PBT) grew by 33% to $81.9m, though Goldman Sachs notes the increase benefited from lower-than-expected marketing spend and elevated consulting revenues, due to a significant backlog. The analysts caution both will potentially unwind in the second half, implying a slower pace of growth in H2.

The latter is also reflected in management’s upgrade to FY25 profit (PBT) guidance to a range of 13-17%, up from the previous 12-16%.

Assuming the revised outlook holds, Bell Potter points out second-half profit growth would decelerate to below 10%, a marked slowdown from the 21% (normalised) growth recorded in the first half.

Several analysts see management’s upgraded guidance as “conservative”, particularly given its long-standing history of exceeding guidance.

Indeed, analysts at Goldman Sachs maintain their belief 15-20% profit growth represents the “new normal” for the company.

Morgans notes management has consistently delivered an impressive 15% EPS compound annual growth rate (CAGR), which has begun to accelerate towards management’s 15%-20% medium-term target thanks to the SaaS-Plus transition.

SaaS-Plus

The company’s SaaS-plus offering goes beyond traditional Software as a Service by bundling software, implementation, support, upgrades, and ongoing management into a single, unified offering.

The customer pays one annual fee, with no upfront costs or hidden extras, dramatically reducing risk, cost, and implementation time.

An ERP project that typically takes Oracle two years can now be implemented by TechnologyOne in just 16 weeks, with management aiming to reduce this timeframe even further.

Macquarie anticipates a further shortening in time after the 25B product release in August/September, which will include meaningful technological improvements.

For the uninitiated, ERP software is a term used to describe the collection of key data within larger organisations, including Accounting, Human Resource Management, Enterprise Content Management, Payroll, etc with those core functions integrated into one unified system for management.

Importantly, given it is pioneering the company’s strategy, momentum for the UK business is accelerating, and all contracts are SaaS-Plus.

For the half, annual recurring revenues (ARR) in the UK rose by 50% and UK Sales ARR increased by 61% compared to the prior year. This business now represents around 8% of group ARR.

Verticals

The company’s verticals are Local Government, Education, Government, Health &Community Services, Asset & Project Intensive Industries, and Financial & Corporates.

Demonstrating success in larger-scale and more complex local governments in the UK, TechOne won its first London Borough contract at Islington, the second most densely populated local government authority in the country.

Competitor Oracle has historically held a strong grip on most London Boroughs, note the analysts at RBC Capital, and now TechnologyOne is having its day.

Also, management is seeing an increased opportunity in the Australian Federal government space, which RBC notes is currently dominated by German-headquartered technology heavyweight SAP.

Cash and investment on 31 March stood at $211.9m, up by 23%. TechOne has zero debt.

Management noted the strong balance sheet enables execution on strategic acquisitions, where appropriate.

The board declared a record interim dividend of 6.6 cents, a rise of 30%. It marks by far the biggest increase over the last decade, highlights Wilsons.

More on interim results and targets

Used to assess the balance between growth and profitability for software companies, the Rule of 40 metric for TechnologyOne is 49.4%, which compares to other ASX-listed software heavyweights Pro Medicus ((PME)) and Xero ((XRO)) on 71% and 44.3%, respectively.

The metric is calculated as the sum of a software company’s free cash flow margin plus the revenue growth rate.

Talking revenue, including APAC and UK contributions of $468m and $43.1m, respectively, total ARR rose by 21% to $511m, aided by the acquisition of CourseLoop, which contributed $9.1m, notes Morgans.

CourseLoop, a curriculum management platform designed specifically for universities, has enabled the OneEducation platform to become the world’s first SaaS solution to support the entire student lifecycle, from course design to graduation, within a single, unified ERP system.

In the near-term, the company is very confident of more University deals, similar to the University of Chester win last year, where student management and financials are combined, with the opportunity to add on other products like CourseLoop, explains RBC Capital.

Highlighting room for growth, management noted the APAC region market penetration in any single vertical does not exceed 15% of the addressable market.

The company’s Education vertical grew in the first half ARR by 27% while the largest and fastest growing Local Government vertical (at 38% of total ARR) increased by 20%.

While Government sits outside the company’s two major verticals (Local Government/Councils & Education), UBS notes it is shaping as a major growth vertical. In the period, management won its first contract (Australian Energy Regulator) through the recently established federal procurement panel.

The net amount of new ARR from existing customers, measured by net revenue retention (NRR), was 118% for the 12 months to March 31, with Morgans highlighting momentum across the group remains solidly towards the top end of management’s growth range of 115%-120%.

The bottom end of this targeted range is sufficient to double revenue every five years, points out Wilsons.

UBS refers to the ongoing success of product upsell and SaaS-Plus, supported by extremely low customer churn of 0.3%.

Management has a new goal of $1bn in ARR by FY30, having surpassed the $500m target 18 months earlier than planned, and 35% profit (PBT) margins over the long-term. The interim margin was 28.7% (27.5% underlying).

While higher margins are largely reflected in the current valuation, Shaw and Partners suggests the successful realisation of meaningful operating leverage could still serve as an upside catalyst for the share price.

Outlook

Following this week’s interim results for TechnologyOne, the average target of seven daily covered brokers in the FNArena database jumped to $34.87 from $29.85, but remains -8.2% below the latest $38 share price.

UBS’s Buy rating is the exception, backed by the highest price target of $42.20. The remaining six brokers prefer a Hold/Neutral rating, with upgraded price targets mostly in the mid-$30s.

Analysts at UBS continue to believe profit growth will gradually accelerate over time, with risks skewed to the upside. While the valuation is not cheap, the analysts consider the short-term multiple (66x times cash EBITDA) as defendable in the context of the company’s long-duration growth, very sticky customers, and Rule of 40 metrics.

Shaw sees a challenge for the current share price, which has more than doubled over the past 12 months.

Shaw’s lower near-term cashflows estimates have been offset by a lower assumed discount rate and higher terminal growth projection, resulting in a $36.50 target, up from $29.30.

Outside of daily coverage, Goldman Sachs is Neutral rated, while Wilsons and RBC Capital are on Buy or equivalent. The average target of these three is $40.36.

The author owns shares in TechnologyOne.

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