Yet another strong year for Technology One.

Annual Recurring revenue (ARR) up 43% to $192.3m following an 18% lift in SaaS customers.

NPAT came in at $72.7m, a gain of 15%.

The dividend increased by 8% (for the 7th year in a row), with 62% of NPAT returned to shareholders. This is a business that can grow really well with minimal capital reinvestment.

Like many software businesses, they are transitioning away from a license model to a recurring revenue model -- something that is a great long term move, even if it drags on revenue during the transition.

The company reckons it can roughly double its ARR over the next 5 years, achieving a ~14% compound annual growth rate. And that it can also increase its pre-tax net margin to 35%.

Taking these numbers together, and assuming around 330m shares on issue, that gives an EPS of roughly 40cps (compared to 22.6cps in FY21).

Over the last 5 years, the average annual PE ratio has been between 30-40. So if we assume a PE of 35 for FY26, that gives a target price of $14, which is $8.69 if you discount back by 10%pa.

Even a more bullish assumption of a PE of 40 and a target EPS of 45cps, you get a target price of $11.18.

To come at it another way, let's assume the dividend continues to grow at 8%pa and that the company trades at a yield of 1.5% in FY26. That also gives a target price of $14 or $8.69 when discounted back.

TNE is a very high quality company. High margin, high retention, high growth, rock-solid balance sheet. But I think a lot depends on the market maintaining high multiples for shareholders to achieve attractive returns. My concern is that even if the company does indeed double sales every 5 years (as they claim), any multiple contraction -- which would be likely under a higher rate environment -- would add some significant downward pressure on the share price.

I have a small holding which i'm happy to keep, but not tempted to add more at these prices.

Technology One has delivered a strong first half result, reporting a record pre-tax profit of $37.3m, up 44%. ARR from SaaS was up 41% to $155.8m.

The dividend was lifted by 10%, something the business has done consistently since at least 2012.

Total revenue was up 5% with an 18% drop in license revenue offsetting a 35% lift in SaaS revenue -- as expected, with the business transitioning customers to the new payment model.

Revenue from the SaaS business is expected to grow at ~15%pa as the legacy license fees are wound down in the coming years.

The business continues to invest heavily into R&D, lifting the investment by 14% (it's about 24% of revenue). However general expenses have dropped 5%, which has helped lift the net margin.

In fact, the net margin in FY20 was a record 29% and management expect this to further increase to 35% in the coming years.

The balance sheet looks very strong, with $100m in cash and no debt -- a 20% improvement from the previous corresponding period.

The business (as usual) reported negative free cash flow for the half, but this is expected to be "strong" for the full year (invoices are typically issued in the second half).

In fact, FCF is expetced to be roughly 80% of NPAT in the full year, and is expected to grow to 100% as capitalisation of R&D and amortisation rates start to align in FY24.

The UK business is now profitable and is expected to deliver a net profit for the full year. The company sees "significant upside" in this market in the coming years, and the market there is 3x the size of the local region.

Customer churn remains insanely low, at 99% across all markets. As such, the lifetime value of a new client is significant.

For the full year, Technology One is expecting to report a 10-15% lift in underling profit (or a 14-20% lift in statutory profit). At the mid-point, and applying the usual tax rate, that's an EPS of ~23c and puts shares on a forward PE of 39x

That's up there, but given the reliability of cash flows, the expected growth and a super resiliant balance sheet, it doesnt seem unreasonable. The business expects to double in size over the next 5 years thanks to improving margins and continuing top-line growth.

That suggests an EPS of 46c in FY26.

What a great business.

You can read the results presentation here.

A great post from Strawman member Wini on what's going on with Technology One's earnings..  

Click here to read

Adrian Di Marco is Technology One's founder and chairman, having just recently handed the CEO position to long-term TNE executive Edward Chung.

Adrian has over 31m shares, or about 10% of the company.

Director John Mactaggart was an early backer in the business and has over 42m shares.

Technology One develop, sell, implement and support enterprise software for organisations in specialised markets including government, education, financial and health. (Think HR/Payroll, financials, supply chain management, content management etc). A good overview in this recent presentation.

Formed over 30 years ago, it is the dominant provider in its chosen niche and has sustained double digit growth for many years. At present, the business has less than 15% penetration in each vertical in the Asia-pacific market -- so there remains lots of potential for further growth.

Their products are tightly integrated into client systems, and difficult to migrate away from. This is evidenced by 99% customer retention.

The business is debt free with around $93m in cash. It has high pre-tax margins, which are expected to increase from 21% to 25% in the next few years as the business continues to scale. Technology One have continuously paid a dividend over the past 22 years, with dividends (including special dividends) growing at 16%pa on average over past 5 years.

The business has a huge R&D initiative, spending about $50m each year in this area, which is fully expensed. This helps fortify their existing offering, and has seen them expand the product range which will help underpin future growth.

There is big potential in the UK market, which has achieved a critical mass in the past year and is 3x larger than the local market. However the profit contribution is fairly negligible, and unlikely to see any material growth for another couple years as the business consolidates.