It seems that Information Technology Sector’s Stocks are again beating the market with the rise in popularity of cloud-based software-as-a-service (SaaS) platform and other technological innovations. Over the past few months, Australia’s spending on computer software has jumped up quite heavily driven by benefits from the technology-led innovations, low initial costs, upgrade capabilities and so forth. Below are 11 key stocks of the sector worth looking at -
 

Xero Ltd

Positive operating cash-flow: Xero Ltd (ASX: XRO), a leading accounting platform, witnessed a stock price rally of 5.98% on May 10, 2017 and is now nearing its 52-week high price post the release of full year results (ended March 2017). The operating revenue has surged about 43% to $295.4 million for the year (51% rise when excluding currency movements) while the subscription revenue surged 44%. XRO has been able to grow its customer base by 44% to just over 1 million customers globally in last one year and net subscriber additions for the year were 318k. There was also an improvement in net loss after tax to $69.1 million from $82.5 million of last year alongside improvement in EBITDA loss and gross margin percentage. XRO has hit positive operating cash-flow for the first time in the second half of the year, and has $113.7 million of cash and short-term deposits. The group aims to benefit from growing importance of small business in the economy. We give a “Hold” recommendation at the current price of $ 21.80
 

Balanced Investment and Growth with Operating Efficiencies (Source: Company reports) 

Nearmap Ltd

Launch of New Zealand pilot capture program:Nearmap Ltd (ASX: NEA) has completed a one-off capture of New Zealand’s main economic areas, and has already secured the first commercial sales of the imagery to its Australian customers. The capture program was completed in March and covers approximately 72% of the New Zealand population. The launch was to address the existing customer needs as Australian customers have significant business operations in New Zealand and have been requesting access to high quality location content of New Zealand similar to that which Nearmap has been providing them in Australia. Further, this capital-light pilot program allows the company to explore the expansion of Nearmap’s world leading technology further in the global location content market. Further, shipment of the first full production hypercamera2 to the United States is a major milestone as it commences commercial oblique and 3D imagery capture in that market. Significantly, HyperCamera2 complies with applicable Federal Aviation Administration (FAA) safety requirements, allowing capture to commence immediately. Importantly, shipment of the first full production HyperCamera2 enables the commencement of full commercial capture, with significant United States and Australian coverage planned in calendar 2017. For H1FY17, NEA posted a revenue growth of 38% year on year (yoy) to $19.4m while EBIT grew by 46% yoy to $10.2m led by solid growth in both Australia and the US. The stock has declined 34% in the last six month as on May 10, 2017 over investors’ concerns on the company’s expansion into the USA. Given the latest developments and growth expectations going forward, we maintain a “Buy” recommendation on the stock at the current price of $ 0.49

NextDC Ltd

Developing three new world class hyper scale data centers: During H1FY17, NextDC Ltd (ASX: NXT) updated that its capacity at S1 (Sydney) was upgraded from 14MW to 15MW, with additional data hall space being fitted out at S1 and M1 (Melbourne) to support customer requirements, while B2 (Brisbane) and M2 (Melbourne) are on track to achieve practical completion towards the end of 2H17, with ~1.5MW and ~2MW of initial capacity, respectively. Further, S2 (Sydney) site under contract with development approvals in progress and practical completion is expected towards the end of 1H18. For H1FY17, the company reported a revenue growth of 39% yoy to $58.7 million while EBITDA grew by 110% to $23.9 million. Profit before tax and operating cash flows stood at $8.0 million, $25.4 million, respectively. Contracted utilization grew by 32% to 30.0MW at 31 December 2016 while Interconnection (cross connects) was up 42% to 5,472. For FY17, the company is expected to report $115-$122 million revenue and EBITDA of $46-$50 million while capital expenditure will be at $260-$340 million. The stock has moved up 36% in the last three month as on May 10, 2017. We give a “Hold” recommendation on the stock at the current price of $ 4.42
 

EBITDA Growth (Source: Company reports) 

Bulletproof Group Ltd

Partnering agreement with Accenture:Bulletproof Group Ltd (ASX: BPF) entered into a reciprocal partnering agreement with Accenture Operations (Asia Pacific). With the agreement, Bulletproof will provide Consulting, Implementation and Support services for Amazon Web Services, Azure & Private Clouds and will assist customers at all stages to cloud. Further, Bulletproof is currently actively working with Accenture on several opportunities with blue chip clients that leverage the relative strengths of the two companies to bring best-in-market outcomes for them. Other opportunities are expected to follow to provide a significant flow of work for Bulletproof to perform for a range of corporate and government clients. During H1FY17, the company experienced a relatively flat March quarter 2017 in recurring public cloud revenues, as a result of customer churn and buying behavior, partly offset by sales growth during that quarter. Further, with roll-forward effects, this has resulted in a $4.0m lower recurring public cloud revenue outlook for the second half of FY17, compared with prior internal forecasts. Professional Services revenues for the second half of FY17 are expected to be $1.5m below previous forecasts, as a result of a relatively quiet March quarter and a slightly lower outlook for project work in-hand and in pipeline for the June quarter than was previously expected. For FY17, revenues expected to grow by 3% yoy to $48.5m, while underlying EBITDA to be ~$3.0m with EBIT loss of $1.5m. The stock has declined by 55% over past six months and slipped by about 4% on May 11, 2017, and currently trading at 52 week low. Given the volatility, we give a “Hold” recommendation on the stock at the current price of $ 0.11

Aconex Ltd

Increasing operating leverage:During H1FY17, Aconex Ltd (ASX: ACX) reported a revenue growth of 38% yoy to $77.0 million, primarily driven by the acquisition of Conject Holding GmbH in March 2016 and strong international growth. Earnings before interest, taxes, depreciation, and amortization (EBITDA) from core operations, excluding acquisition and integration costs grew by 9% yoy to $7.4 million. The company’s cash and cash equivalents stood at $43.2 million at 31 December 2016 against $52.5 million at 30 June 2016. Net operating cash flows from core operations increased to $5.4 million from $2.9 million during the same period. Aconex reaffirmed its earlier (Jan-2017) outlook for FY17, as it expects revenue of $160-165 million and EBITDA of $15-18 million. Further, company continues to invest in sales, marketing and customer service, particularly in the Americas and Asia, to capitalize on growing adoption of project-wide collaboration solutions. The stock has declined about 22% over the past twelve months owing to its reduced guidance in revenues and EBITDA over previous guidance for FY17. However, it has moved up 39% in the three months as on May 10, 2017, we give an “Expensive” recommendation on the stock at the current price of $ 4.83

Altium Ltd

Expects to exceed revenue target of US$100m in FY2017: During H1FY17, Altium Ltd (ASX: ALU), which focusses on electronics design systems for 3D Printed Circuit Board design and system development, witnessed a revenue growth of 14% to US$48.7m while EBITDA grew by 18% yoy to US$12.5m with EBITDA margin of 25.8% against 25.0% in H1FY16. During the same period, Board and Systems revenue increased by 10% yoy to US$39.4m led by strong performances in EMEA, China and APAC. Importantly, Octopart delivered a record performance of US$3.5m revenue by growing at 65% yoy while Altium’s TASKING business also had an exceptional performance with revenue of US$5.2m. Notably, company reported better performance while building further capacity in the America’s to keep up with market demand after explosive growth in fiscal 2016. Moreover, the company is expected to exceed revenue target of US$100m in FY2017, and remain poised of realizing US$200m in total revenue in 2020. However, the stock is trading at higher levels and we give an “Expensive” recommendation at the current price of $ 8.65

Empired Ltd

Continues to build on recurring revenue:Empired Ltd (ASX: EPD) has reported a revenue growth of 8% yoy to while EBITDA of $6.4m for H1FY17 was reported. Importantly, the company witnessed strengthening of operations across business verticals despite of New Zealand earthquake impact and annual holiday period in Q2. Further, reduction in overhead expenses combined with improved gross margins led to improved profitability. The company has several programs underway to continue to drive margin improvement including the ramp up of delivery center in Bengaluru, better operational systems to drive improvements in utilization and in a more efficient manner. Energy and Natural resources sector is also offering growth opportunities for the company. Further, during Q3FY17, company has successfully completed a capital rising of $16.0m through a placement of approximately 36.3 million new ordinary shares at $0.44 per share to reduce net debt and balance sheet risk and working capital. For FY17, the company is expected to report EBITDA of $15.0m-$16.5m while net debt to EBITDA is expected to be at ~0.60x. The company will hold its general meeting on May 18, 2017. Despite, 18.4% return over the past one year, the stock has declined by 15% on year to date. We give a “Speculative buy” recommendation on the stock at the current price of $ 0.45
 

Revenue Trend (Source: Company reports) 

Isentia Group Ltd

Client churn returning to historic norms:During H1FY17, Isentia Group Ltd (ASX: ISD) revenue grew by 5% yoy to $79.6 million, while EBITDA declined by 13% yoy to $20.5 million impacted by EBITDA loss of $2 million in content marketing. In turn, underlying PAT witnessed a de-growth of 17% yoy to $12.4 million. However, SaaS and VAS businesses in ANZ and Asia delivered attractive revenue growth of 15% yoy supported by higher demand for Insights products. Importantly, the marginal decline in ANZ SaaS/VAS EBITDA in the H1FY17 replicated a more challenging environment for SaaS revenue in November and December and the increase in copyright fees. For FY17, ISD expects the ANZ and Asia SaaS/VAS business to deliver mid to high single digit revenue growth and low single digit range EBITDA growth. During Q3FY17, the company has launched the improved Media portal and 97% of users have migrated to the new platform and reflecting positive response to new product release while the client churn has returned to historic norms. We give a “Speculative buy” recommendation on the stock at the current price of $ 1.77

Senetas Corporation Ltd

Exposure to Medical Radiology through acquisition: During H1FY17, Senetas Corporation Ltd.’s (ASX: SEN) operating revenue grew by 8% yoy to $9.34 million while net profit after tax was down 45% yoy to $0.86 million. Gross profit margin and pre-tax profit margin stood at 73%, 14% respectively. Results were impacted by disrupted customer ordering patterns as the number of largest customers have been undergoing network upgrades which slowed demand for products during HY17. Notably, the key focus during H1FY17 was a progressing certification for the 100Gbps encryptor and making changes in response to demands from end customers who have been testing the encryptor in their network environment. Going forward, highly innovative and responsive R&D capability remains the company’s core focus and will be the major driver of growth prospects and increased profitability. On May 11, 2017, the group underwent a trading halt and later announced about acquiring an interest in DeepRadiology (medical machine learning and artificial intelligence company having first autonomous radiology scan interpretation and reporting system) for US $1 million.We give a “Hold” at the current price of $ 0.092

Freelancer Ltd

Robust performance:Freelancer Ltd (ASX: FLN) lately reported that its cash receipts in Q1 2017 of AUD 12.5 million (USD 9.3 million) surged up 20% compared to the same period last year. The company experienced growth in key metrics in the core marketplace segment during Q1 2017. However, continued weakness in the Escrow.com payments segment was reported. During FY16, reported robust revenue growth of 37% yoy to $52.7 million while posting positive EBITDA of $ 0.5 million. Notably, company witnessed a fastest revenue growth since IPO in USD with record Gross Profit of $45.6m and gross margin of >86% led by increased user base, project and contest acquisition through a range of channels. Importantly, company’s advantage lies in the revenue composition as USD is the main operating currency of the group and comprised of 75% of revenue in FY16. Further, cash flows increased by 207% yoy to $4.5m and cash & equivalents stood at $34.8 million. We give a “Buy’ rating on the stock at the current price of $ 0.78

NetComm Wireless Ltd

Investing in businesses and generating strong operating cash flows: NetComm Wireless Ltd (ASX: NTC) witnessed the company winning 3 out of 3 major contracts tendered so far with reputed customers which are Ericsson/nbn Fixed Wireless, nbn FTTC and US Fixed Wireless. While the Ericsson is producing revenue now, ramp-up is expected during FY18 for the remaining two. Further, the company has increased its fixed wireless coverage by 144k premises since 31 December 2015 to be at 485k premises at 23 March 2017 while take up rate increased from 24.3% to 34.9% during the same period. For H1FY17, group operating revenue grew by 1.2% to $47.0 million led by M2M & Fixed Wireless revenue as it grew by 16.4% yoy growth to $36.3 million (77% of Group revenue). While adjusted EBITDA grew by 40.5% yoy to $12.5 million, there was NPAT loss of $1.7 million. Importantly, the company is continuously investing in growth assets to support long term revenue growth. For H1FY17, company witnessed a strong cash generation with cash inflow of $6.1 million. The stock fell about 3.6% on May 11, 2017 and is trading at low levels. We give a “Buy’ rating on the stock at the current price of $ 1.34

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