TechnologyOne (ASX: TNE) CEO Edward Chung has affirmed the company will continue to grow strongly in a challenging economic environment after doing so for more than three decades, as the Brisbane-based software group reports its 13th year of record first-half profits.
The 18 per cent year-on-year rise in profit after tax to $33.2 million was driven by the wide-scale transition of customers away from TechnologyOne's legacy licence business to its upgraded software, following more than five years of shifting focus from a traditional on-premise model to being a Software as a Service (SaaS) provider.
Chung is optimistic the sectors TechnologyOne serves such as local government, higher education and government agencies will be resilient, and the software's "deep functionality" will be mission critical at a time when customers turn to enterprise resource planning (ERP) software for greater efficiency.
"There is concern in the financial press about the deteriorating economic environment because of inflation and increasing interest rates," Chung said in an ASX announcement this morning.
"Over the past 35 years we have continued to grow strongly in challenging economic environments such as this."
Increased profit margins are being driven by the wider adoption of TechnologyOne’s single instance global SaaS ERP solution technology, which provides significant economies of scale and has now been adopted by 714 customers – up 24 per cent during the first half.
Chung believes the company, having increased its annual recurring revenue by more than 40 per cent, is well-positioned to deliver growth in net profit before tax of 10-15 per cent in FY22.
“These are strong half-year results for TechnologyOne and validate the strength of our SaaS strategy, which continues our strong growth trajectory in both Australia and the UK,” Chung added.
“We have also had many strong wins and organic growth. Nineteen large scale enterprise customers partnered with us in the first half, including Shire of Mornington Peninsula and City of Manningham in Australia, Gisborne District Council and Ministry of Justice in New Zealand and Newport City Council, Derby City Council and Royal Conservatoire of Scotland in the UK, all of whom are keen to transform their operations and free up time and resources which can then be invested into their customers and community.”
Announcing significant half-yearly research and development investment of $41.5 million alongside the results, TechnologyOne will extend the functionality and capability of the global SaaS ERP solution, including a dedicated local government platform Chung believes will create additional long-term future growth.
“Traditionally, cash flow generation for TechnologyOne is weighted to the second half, aligned with customer payment anniversary dates, resulting in negative cash flow in the first half,” he said.
“This half-year, we delivered a break-even cash flow generation result, with cash and cash equivalents up 16 per cent. Cash flow generation will be strong over the full year, and we expect it to represent approximately 85 per cent of net profit after tax. Cash flow generation will progressively align to NPAT by FY24.”
The company acquired UK-based higher education software provider Scientia Resource Management for $22 million in 2021, which has helped drive growth in both the UK and Australia.
“We are already seeing good traction with this acquisition. Scientia’s unique IP and market-leading functionality brings opportunities to expand our enterprise footprint in higher education and drive our growth into this important market,” Chung said.
Departing TechnologyOne founder and chairman Adrian Di Marco, who announced in February that he would step down to make way for the incoming Pat O’Sullivan on 30 June, confirmed the dividend for the half-year increased to 4.2 cents a share, up 10 per cent on FY21.
“Our results are due to the continuing strong demand for our global SaaS ERP solution. Today, more than 97 per cent of our revenue comes from our SaaS and continuing business. This is an outstanding achievement for the company to have transitioned from a traditional on-premise company to a SaaS company over the last 5-plus years,” he said.
The business hopes to continue reducing its legacy licence fee business, which will be down roughly $12 million for the year, as it looks to aggressively grow its customers' adoption of its SaaS business.
“Over the next few years, our SaaS and continuing business is expected to continue to grow strongly as our legacy licence fee business comes to an end,” Chung said.
“We are on track to deliver total annual recurring revenue (ARR) of more than $500 million by FY26, from our current base of $288 million.
“The economies of scale from our global SaaS ERP solution will also see continuing profit before tax margin expansion to 35 per cent.”
Shares in TechnologyOne (ASX: TNE) dropped 3.94 per cent to $10 as of 11.32 AEST after today’s announcement.
While they have fallen from December levels like many in the sector, TNE shares are up by more than 11 per cent over the past 12 months. This is not quite as high as logistics software player Wisetech Global's (ASX: WTC) 52 per cent rise, but it is ahead of significant declines for the likes of Xero (ASX: XRO) which is down by more than 30 per cent, and international companies such as Atlassian (-20 per cent), Salesforce (-29 per cent), Dropbox (-24 per cent), and Palantir (-62 per cent).
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