Technology One: Sliding up the S curve

About the author:

Nick Harris
Author name:
By Nick Harris
Job title:
Senior Analyst
Date posted:
25 May 2021, 2:30 PM
Sectors Covered:
Telecommunications, Technology

  • Technology One (ASX:TNE) delivered a strong 1H which was broadly in line with our expectations, as was their full year guidance for nearly $100m of PBT.
  • FY21 guidance implies total revenue grows ~7% in FY21 (from ~4% growth in FY20). Under the hood strong double digit SaaS revenue growth has been muted by declining on-premise revenue. As recurring revenue grows the mix improves and the double-digit revenue growth (which is also much higher quality than transactional) will become increasingly obvious.
  • We make minor changes to our forecasts and change our target price (login to view).

1H21 result snapshot

Revenue grew 5% to $144m, expenses declined 5% to $107m and PBT grew 44% yoy to $37m. EPS was up 48% yoy and the dividend was up 10% yoy to 3.8cps (60% franked).

Operating cashflow was down yoy (the prior year had some positive timing difference). TNE ended the period with a very healthy $100m in net cash and this cash position will grow as cashflow seasonally rebounds in 2H21.

R&D spend grew well ahead of OPEX at 14% yoy, with expenses R&D up 32% yoy and capitalised R&D up just 1% yoy. SaaS fees recognised grew 35% yoy and ARR grew 41% yoy to $155.8m.

Outlook

TNE expect FY21 profit before tax of $94.3m to $98.6m. This is up 10-15% on an underlying basis and up 14-20% on a reported basis (FY20 had some one-off costs).

Free Cash Flow for FY21 (after tax, rent and capitalised items) is expected to be around $58m (~80% conversion relative to NPAT). Cash conversion should progressively improve to ~100% by FY24 when capitalisation and amortisation broadly match each other.

Noteworthy items – clear steps to $500m of ARR

TNE had $234m of ARR in 1H21 and have an aspirational target to reach $500m of ARR by FY26. Taking existing legacy TNE customers (with an on-premise solution) and migrating their current offering to TNE’s Cloud would grow TNE’s ARR by $180m to $414m.

Assuming the current net new adds hold and an average spend (which is challenging as averages are misleading) would see TNE add enough customers to hit that $500m ARR target by FY26.

SaaS customers tend to take at least 1 additional TNE product so, assuming TNE’s legacy flipped SaaS customers act like all other SaaS customers have, this would further increase ARR. Additional SaaS modules and next generation initiatives like DXP (digital experience app) should also support revenue growth.

COVID-19 made life difficult for many customers but one positive was that it prompted many businesses to move to digitally transform 2-3 years earlier than originally planned. Some TNE customers moved quickly to SaaS and now that they have gained comfort with TNE’s SaaS solution are likely to buy more modules more quickly.

Investment view – Add retained

We have upgraded our FY21/22 revenue and costs forecasts.

Our normalised EPS forecasts decline 3-4% in FY21/22. A peer refresh and roll forward in time results in our target price increasing (login to view). We retain our Add recommendation.

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