Company Overview: Technology One Limited is an enterprise software company. The Company is engaged in the development, marketing, sale, implementation and support of enterprise business software solutions. The Company's segments include Sales and Marketing, which includes sales of license fees and customer support to its customers; Consulting, which includes implementation, consulting services and custom software development services for large scale purpose built applications; Research and development, which includes the research, development and support of its products; Cloud, which includes delivery of cloud hosting services to its customers, and Corporate. Its enterprise business software solutions include TechnologyOne Financials, TechnologyOne Enterprise Asset Management, TechnologyOne Supply Chain, TechnologyOne Human Resource and Payroll, TechnologyOne Property and Rating, TechnologyOne Stakeholder Management and TechnologyOne Student Management.


TNE Details

Technology One is one of Australia's key enterprise software companies with offices across multiple countries. The tech player is known for creating solutions that transform business and make life simple for its customers. Its SaaS offering is delivering a compelling value proposition to its customers by providing them with new software features, facility relating to ‘any device, anytime access from anywhere around the globe’, as well as a simple and cost-effective way to run enterprise software. The Group is planning to release its Digital Strategy, which will be built upon the powerful foundations that Group has created; its mass production SaaS platform and its Ci Anywhere technology. Artificial Intelligence (AI) and Machine Learning (ML) are an integral part of its Digital Strategy. The Group takes the responsibility for building, marketing, selling, implementing, supporting and running its enterprise solution for each customer to guarantee long-term success. The return on equity for the group was strong at 28% in 2017 (while it has dropped post the latest result), and the group has paid dividends over last 22 years. The group has the strength with which it scored 99% of customer retention.


License Fee Contribution (Source: Company Reports)

Rising Annual Contract Value – While the market was expecting a better half yearly result, the Group still managed to announce a stronger first half result for FY2018 than originally expected and outshadowed the previous guidance that the first half ending 31 March 2018 would be challenging. The Company delivered a record revenue, record licence fees and is continuing to deliver a very strong growth in its cloud business. Its SaaS business continued to grow very fast as Annual SaaS Platform Contract Value (ACV) increased by 51 per cent as compared to the same period in the prior year and amounted to $31 million per annum and is expected to reach $143 million per annum in the next 4 years. Its cloud segment also delivered a profit of $3 million which was up by 217 per cent as compared to the same period in the prior year.


Annual Contract Value Performance (Source: Company Reports)

Total Annual Recurring Revenue is on track to reach $173 million this year, representing 55 per cent of its Total Revenue. Technology One also continued to invest heavily in Research and Development, which was $25.6 million fully expensed and was up by 8 per cent as compared to 1HFY17. Initial Licence Fee was stronger than what was originally anticipated in the first half and was up by 7 per cent as compared to the 1HFY17. In light of the company’s healthy results, the dividend for the first half increased to 2.86 cents per share and was up by 10 per cent on the prior year. Operating cash flow decreased from $2.6 million for the half year ended 31 March 2017 to ($10.4 million) for the half year ended 31 March 2018 and this decrease was primarily due to a few large deals that were signed in March and $17 million was received in the first few weeks of April. The cloud contributed to an additional $12.1 million of free cash flow in this period. On the other hand, consulting reported H1 loss of $0.5 million versus $0.3 million in prior corresponding period.


Dividend Performance (Source: Company Reports)

Positive Outlook – The group is forecasting Total Annual Recurring Revenue to be about $345m in 2022, which will represent 70% of its Total Revenue. Its focus is to substantially improve PBT margins through controlled R&D growth and product maturity. It has a clear strategy for continuing long-term growth and Group’s mass production architecture will be a significant generator of profits in the coming years because of the resilient nature of the enterprise software market and due to strong expansion plans in UK market. In 2017, the Initial License fees was up by 10 per cent which was the 14^th consecutive year of strong License Fee growth. It is also delivering its entire enterprise suite on mobile devices.


2018 Outlook (Source: Company Reports)

It will deliver all remaining functionality of its Ci Anywhere technology in late 2018 and has a significant competitive advantage. TNE is the only ERP vendor that is committed to 100 per cent of its ERP functionality across all mobile devices. Its single instance, mass production, SaaS offering is gaining momentum and is becoming a significant engine for growth and margin for this business is expected to continue to expand because of the mass production architecture which is expected to exceed by 30 per cent in the coming years. The Group is currently finalising its position in respect of IFRS with its Auditors and Board and its first reporting period under IFRS will be the year ending 30 September 2019.


Outlook of UK License Fee Growth (Source: Company Reports)

Full Year Guidance Update and Clarification - The Company is on track and is expected to deliver a profit growth of between 10 per cent to 15 per cent over the full year as per its standard profit after tax metric. The Company did not provide any guidance update on ‘underlying profit growth’ because the Company had no intention to continue to report ‘underlying profit growth’ for the 2018 full year. The only reason that ‘Underlying profit growth’ was reported in 2017 was that the Company missed its guidance and did so to highlight the abnormal items that it had experienced. The Company has again clarified this and indicated for significant abnormal items. These include significant abnormal items like restructuring costs of the consulting business, significant investment in the UK consulting business and reduction in Annual Licence Fees.


Annual Recurring Revenue Performance (Source: Company Reports)

Stock Performance - The Group’s cloud first strategy was driving its continuing strong results. The market is clearly seeing the benefits of its single instance, mass production, Software as a Service (SaaS) offering over its competitors. It is continuously making significant investments in the UK for future growth and remains confident that the UK is an exciting and a large market for its products and will become a significant contributor of profit growth in future years. Technology One now has 280 large-scale enterprise customers, with many tens of thousands of users, making it the largest single instance ERP SaaS offering in Australia.

By the release of its next stage of Digital Strategy, it will now be able to roll out its enterprise system to tens of thousands of stakeholders quickly and easily as has never before been possible to truly enable the digital revolution and will create the platform for its next stage of growth. The company has a plan to invest $54 million dollars in R&D over the full year. It signed a number of deals and closed them earlier than expected, and this positions the Group well for the full year and now it continues to dominate the local government and higher education markets. Since, one year, the stock has been showing a downward trend with a fall of 20.76 per cent and declined by 7.08 per cent in last three months. The stock was down by 4.09 per cent in last five days, as at May 28, 2018 as the market signalled for concerns on UK loss estimates and consulting division’s shortcomings; however, there seems to be a buy in the dip opportunity as acceleration in cloud profitability, customer pipeline and improvement expected in consulting in second half seem to benefit the group. We give a “Buy” recommendation at the current market price of $4.33 (down 2.9% on May 29, 2018), given the future potential in this competitive landscape of Technology.
 

TNE Daily Chart (Source: Thomson Reuters)

 
Disclaimer
 
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.