Pinned straw:
$TNE announced their 1H FY26 results today.
Their Headlines
- Profit Before Tax of $89.1m, up 9%
- Profit After Tax of $66.8m, up 6%
- ARR of $598.0m, up 17%
- Net Revenue Retention (NRR) of 114%
- UK ARR of $53.0m, up 23%
- Rule of 40 result of 55%1
- Record Interim Dividend of 8.0 cps, up 21%
- SaaS and Recurring Revenue of $299.2m, up 13%
- Total Revenue of $322.7m, up 11%
- Total Expenses of $233.6m, up 12%
- Free Cash Flow of $20.3m, down 15%
- Cash and Investments of $245.5m, up 16%
- R&D Investment (before capitalisation) of $84.1m, up 22%, representing 26% of total income
My Analysis
It was a soft result (which explains the weak market response), however, it was well-flagged at the AGM in February, and importantly, management say that the raised guidance for FY26 remains on track.
So, without going into a lot of detail, I’d characterise the presentation and the Q&A as one of reinforcing two sets of key messages. First, management carefully explained the several drivers of the softer 1H result while, secondly, reinforcing their confidence that leads to them holding to the raised FY26 guidance. Because there was a fair bit of repetition of messages from prior updates, I’ll point out a few of the nuggets against each of these two parts of the story.
Drivers of “soft” 1H:
- FX: GBP & NZD both weak vs. AUD, and GBP now a more significant revenue contributor
- Phasing of revenue within the half, weighted to back end
- Showcase costs, absent in the PCP, leading to +$9m costs
- Higher R&D spend in the half, related to launch of new features including SaaS+ (R&D 26% of revenue vs. 20-25% target range; will fall back into target so FY likely to end up back within range)
- As $TNE becomes more profitable, tax rate slowly increasing
Confidence in Retaining FY Guidance
- Historical weighting of revenue is to 2H
- Internally, they are now confident on 2H and balance of the focus within the business for BD is on FY27
- Showcase attendance was +85% on prior Showcase, and has had a “10X impact on the sales pipeline" compared to previous event – some of which is expected to hit FY26
(As an aside on style, in various stories and anecdotes there was a bit too much use of "10X" and "order of magnitude" for my liking. The hyperbole is clearly a smokescreen to not give analyst more visibility into performance drivers than management wants. Which I guess is management's call, and they have earned the right to do this over time. But I find it a bit grating. Rant over.)
Personally, I was surprised when management raised FY guidance at the AGM. Ed reminded shareholders that they’d done that 3 months earlier than usual. Who knows what is going on under the hood, but management have definitely laid their reputation on hitting FY26, and my inclination is to trust them, based on the track record.
The chart below shows that the ebb and flow between 1H and 2H can be very significant, so today’s “soft” result has ample recent historical precedence.
Conclusion
Everything indicates to me that $TNE remains on track.
But the market doesn’t yet buy their story that SaaS+ is lifting the overall trajectory of PBT growth to 18-20% (from 13% to 17%) and establishing the ARR growth target of 16-18%.
That said, compared to other SaaS peers, $TNE is holding up pretty well in terms of market belief as measured by SP.
The FY26 result in November will be an important proof point. But isn’t that always the case!
$TNE remains a solid HOLD for me, squarely within my valuation range: $30 ($24-$36), It remains my largest RL ASX holding.
Disc: Held (RL 13%)
@mikebrisy @Karmast generally agree, i will post my valuation and summary. Mike did a good job with the details of the result
SUMMARY VALUATION
The uncertainty surrounding the outcome of software profitability, which players will participate in, and how much those players will participate or not in the evolving value chain, is the main issue. That is unknown, and the variability around outcomes may be large. That is, identifying the winners, if any, and to what extent is difficult, as the value chain can undergo a significant upheaval.
Having said that, there appears to be some software that is better placed, imo. TNE remains amongst the most resilient. The points I see in their favour are being specialised in their verticals, that they can continue to bring value to their clients and being the workflow infrastructure. The clients are usually not corporations but government and semi-government, which may be the slowest to aggressively adopt replacement technology. That gives TNE time. Another aspect is that TNE is focused on the task at hand. They are moving aggressively and trying things; they are not distracted by large acquisitions, competitors eating share or poor financing. The opposite is the case. In this challenging time, the less management has on its plate, the better, imo. There is enough already.
From a valuation standpoint, the exit multiple is the big delta here. The exit multiple talks to the ability to invest profitably (incremental ROE) beyond the forecast period, five years for me, and the assessment of risk around those income streams in that longer time frame. As the facts evolve, we will be able to tighten up that outcome. The segmentation of the value chain between the software providers, the token providers being the LLMs and any orchestration layer that could develop is still to be determined. There is both a bull case and a bear case.
At 67X trailing PE for FY25, and an 18-20% eps cagr, where the exit multiple sits will determine the stock's returns. At 35X, well below its historic range but still well above the market, we derive a strong buy around the $22-23 range, and I think that is a reasonable entry point. TNE is my main software position in the apocalypse, due to TNE’s positioning and focus. The determination of the value chain is my biggest fear. My total entry cost is below $20 after large additions over the last few months. The portfolio position is adequate given the risks involved; imo total software exposure should be considered in this regard.
Solid summary as usual @mikebrisy
This isn't the typical style of earnings call these days. It was a very detailed "pitch" on what they are doing to achieve a doubling again by FY30 and included talk of "heartbeat" and "rhythms". Like you, for me this is a company that has earned the benefit of the doubt and Ed Chung has continued to deliver as CEO but it is also a different style of comms to past days. It has the handwriting of Chair Pat Sullivan (from CAR Group) and new IR manager Giovanni Rizzo rather than what Adrian DiMarco would have presented. I'm not sure it's a good thing but it hasn't changed my thesis at this point.
Even with the 4% drop today, TNE is still on 65 times earnings. So, happy to keep holding but even a small miss for the full year could see it cop a hefty sell off from that kind of multiple, like we have seen recently with so many other local "growth" businesses that disappoint on results day. TNE is as close to a perfect business as we have on the ASX and it is also still priced like one!