Technology One Limited

Higher Research & Development Costs May be a Cause of Concern:  Technology One Limited (ASX: TNE) is into IT industry, and technology business providing services and integrated solutions built on a single modern platform.  The company is responsible for building, marketing, selling, implementing, supporting and running the enterprise solution for each customer to guarantee long-term success.


Comparison of Results Summary on Y-O-Y basis (Source: Company Reports)

The revenue and NPAT increased by 9.0% and 15.0% respectively Y-O-Y, primarily improved by cost control and performance of Technology One SaaS. The revenue stood at $298.6 million in FY18 as compared to $273.3 million in FY17, whereas the PAT stood at $51.0 million in FY18 as compared to $44.5 million in FY17. The consulting fees of the company decreased from $71.3 million in FY17 to $63.2 million in FY18, a decrease by 11.0% approximately mainly on the back of weak performance of UK consulting which encountered the loss of $3.8m vs loss of $1.8m pcp. However, it has started showing a substantial turnaround in the second half of the year.

The company expensed 18.0% of its total revenue as R&D in FY18, an increase of 8.0%. R&D is a significant expenditure for the company, to build the platform for continuing strong growth in the future.

In the short run, the company might be impacted on the back of increasing R&D expenses to maintain sustainable profit growth in the longer period. Moreover, the company might witness uncertain impact in its financial statements, owing to the change of accounting standards to AASB 15. The ROE for the company stood at 30.3% in FY18 implying marginal rise as compared to the previous year. The total expenses are up by 8.0% to $232.1 million in FY18.

Uncertain Regulatory Challenges: Going forward, the challenges of the company may include increased regulatory reform, aging core systems, and funding issues owing to the genuine challenges of the financial services sector.

Meanwhile, the share price of the company increased by 24.02% in the past three months (as on 15 January 2019) and is trading close to its 52-week high of $6.690. By considering the above-mentioned challenges and expectations of the higher R&D costs in the near term, we, therefore, give a “Sell” recommendation on the stock at the current market price of $6.630.
 

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