Technology stocks were the outperformers on ASX in mid-year reporting season and delivered well with S&P/ASX 200 Info Tech (INDEXASX: XIJ) surging over 5.97% in the month of August (from August 01, 2016 to September 01, 2016) while S&P/ASX 200 (INDEXASX: XJO) fell 2.64% for the same period. Street analysts are confident that the momentum might continue going forward. IT services providers, cloud providers and niche players were the performers of the season. Emerging’s tech companies reported significant earnings growth, which would be driving the larger part of ASX. The trajectory of a lot of the earnings growth would gradually result into the migration into the top 200 and top 100 companies. Many of the tech companies have reported the promised performance and also guided for growth going forward. Most of the strong tech companies fall under the software-as-a-service business model, which helped them get a high percentage of recurring revenues. Moreover, many of them have offshore presence, which insulates them from local volatility, and help in getting good currency conversion with strong growth outlook. These companies therefore manage to guide enormous growth and strong visibility of income. Additionally, they are capital efficient businesses, which don’t require a lot of capital to grow as they are into software selling business. This also helps them to grow at comparatively higher rate, which has been seen in June performance of these companies. Most of the tech companies managed to report profit numbers, despite weak economic condition, weak dollar and slowdown from China. Companies have also seen a rise in IT spending from the Government. Further, smart tech companies typically try to capitalize on their dominance of a certain market to disrupt additional markets. Let us now analyze the performance of tech companies in the recent reporting season to understand this better.

 
Top five tech stocks by revenue growth (Source: ASX, Financial Review)

Computershare accounts for 31% of information technology index and has seen run-up over 10%. The company’s revenues had fallen by less than 1% to $1.96 billion even with slowdown in the company’s key segment registry services and a strong US dollar. Compared on constant currency basis, its revenue would have been increased by 5% to $2.07 billion. The strong underlying fundamentals and diversification business benefits helped the company report better numbers. NextDC also surprised the market by reporting a good rise in revenues and guided for $116-122 million of revenues for FY17. Altium is another tech company having business of printed circuit board design software, which reported a 17% rise in revenues to US$93.6 million on the back of the rise of connected devices as a part of internet of things. The share priced jumped 29% on the back of result to $9.45 (as on August 29, 2016) pushing its valuation above $1 billion threshold. Appen is in the business of language and search service provider, and reported 41% rise in revenues to $53.4 million for the full year while net profit was more than doubled to $5.4 million.

There were some stars even in the newly listed tech stocks’ category. One such stock is Wise-Tech Global that reported a rise in its targeted revenues and posted a profit of $2.2 million against a loss of $ 0.7 million. Among others, Redbubble reported a 60% rise in revenues to $114.6 million. On small business platform, Xero Limited reported over and above its targeted subscription revenues for FY16 at $258 million (target of $250 million). The company reported a 51% rise in subscriber base while ARPU increased by 7%. Xero’s operating and investing cash outflow was at $88.6 million. The rise in subscription base and increase in price in Australia, New Zealand and United Kingdom enabled the company to achieve the revenue target. Company’s EBITDA margin improved 17 basis points in 12 months. Another company, Nearmap has also reported splendid performance with rise in revenues and growth in customers. Australia segment reported 26% growth in revenues to $ 29.7 million. The company generated annualized contract value of $ 34.4 million from new business and existing customers. Aconex has reported 50% jump in revenues for FY16 while EBITDA grew 350% driven by strong growth in Australia, New Zealand and International business. The company reported profit of $9.9 million as against a loss of $2.5 million.

Overall, tech stocks have beaten the market expectations and do proffer good growth prospects going forward.

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