Xero Limited
Decent Outlook Ahead: Xero Limited (ASX: XRO) is a New Zealand based software company that develops cloud-based accounting software for small and medium-sized businesses. The market was concerned on the recent move by its directors who disposed their shares into the market. Particularly, the group disclosed to the market that one of its Directors, Andrew Craig Winkler, had an indirect interest in the company and disposed 750,000 ordinary shares at the price of AU$40.0 per share via off-market trade. Moreover, Director Lee Hatton had a Direct and Indirect interest in the company and disposed 78,000 ordinary shares through on-market trade.
On the other hand, Group’s strategy to drive global growth with better financial outcomes being laid through operating efficiencies has delivered on target results. With this, the group improved operating and investing cash flow margins from (71%) to (9%) over three years and its revenue grew at a CAGR of 49% over the same period. Moreover, the total lifetime value of Xero subscribers at 31 March 2018 was recorded at $3.2 Bn, representing about 45% rise in FY18 as compared to the last financial year. Further, XRO has delivered ROE at (12.5) per cent in 2018 against (27.4) per cent in 2017, driven by splendid performance in FY18. Besides this, the group enjoys its cash-rich position with debt-free status which will support to execute growth plans without affecting the financial position of the company in years ahead. Apparently, we expect that the group will continue to focus on growing its global small business platform and cash outflow in FY19 might reduce from FY18 owing to strong subscribers’ growth and revenue growth.
Increasing Lifetime Value (Source: Company Reports)
Following cash flow break-even, it is intended that surplus cash flow will be reinvested, subject to investment criteria, to drive long-term shareholder value. The group lately appointed Steve Vamos as CEO effective 1 April 2018. As of now, we continue to maintain our “Hold” recommendation on the stock at the current marketprice of $ 39.240, as it trades close to higher levels.
Technology One Limited
Stock price fall despite strong performance in 1HFY18: Australia’s largest enterprise software company, Technology One Limited (ASX: TNE) reported a year on year (yoy) revenue growth of 6% to $120 Mn in 1HFY18 driven by robust growth in Initial License Fees (up 6%) and Annual SaaS Platform Contract Value (ACV) for Cloud Services (up 51% to $31 Mn). PBT grew by 1% to $10.42min 1HFY18 from $10.32 Mn in 1HFY17. Besides this, the company is on track to reach Annual SaaS Platform Contract Value (ACV) of $143 million in the next four years.On the other hand, cloud business delivered splendid growth of 217% to $3 Mn in 1HFY18, thus, the management revised the cloud profit for the full year to $7 Mn, up from previous guidance of $5 Mn. On investments front, the company continued to spend intensely in Research and Development. Henceforth,TNE has spent about $25.6 Mn in 1HFY18 (up 8% YoY) and it has a plan to invest $54 million dollars in R&D over the full year, which can be a concern going forward.However, the company is expecting to report 10%-15% YoY profit growth for the full year.
R&D Expenditure Trend (Source: Company Reports)
Considering the company’s strong results, the Board of Directors announced an interim dividend of 2.86 cents per share, 75% franked, an increase of 10% on the prior corresponding period (pcp). The stock fell 6.061 per cent on May 22, 2018 as the market was expecting higher earnings growth. Further, the profit guidance looks low given the price to earnings ratio of about 35x. We give an “Expensive” recommendation at the current price of $4.650.
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