$TNE are holding their investor day today, and have lodged the massive 180 odd-slide deck on the ASX. I'd have liked to have attended today, but there is just too much going on. Clearly, judging by the presentation, there are a lot of slick management presentations giving investors the chance to see more of the broader management team. So I will certainly be keen to read the broker note. I particulary get a lot from the GS Research on $TNE. Their research is backed up by a lot of broader industry and competitor insights and, while I don't always agree with how they translate their insights into forecasts, Chris and Elise do a great job of backing up their analysis - which is more than many do. (For the record, GS have a TP of $19.70, are BUY rated, with a BULL case of $28.65)

There is a lot of content among the flashy slides, including detailed assessment of $TNE market positioning and major competitors in each of its industry segments. I imagine I'll return to the material in some detail over the coming weeks.

Looking at the material, one realises that although we might mainly consider $TNE a local government and educational institution ERP provider, they have year by year been extending and establishing footholds in a much broader range of industry verticals, with a growing range of functional modules. This is the broader platform for growth, to which we can add their recent foray into the UK (still early days).

The Major News Today

$TNE have a great track record of setting long term ARR targets and then hitting them early. While slowly expanding margins. No single result ever "knocks it out of the park", nor do they have bit nasty surprises. Its just relentless, grinding growth, at a decent clip.

Over the years, its probably the one stock I've devoted the least attention to: two results announcements per year, a quick check on the AGM for any updates, and a periodic model tweak. Plus the usual reading and keeping alert for news across its key verticles. In terms of $return per hour of effort invested, its the clear winner in my portfolio.

So, today's material news:

• From ARR = $500m in FY2025, to ARR = $500 by 1H FY25 (recently upgrade from FY26)
• ARR = 1bn by FY30
• NRR to be 115%-120%
• R&D to double their "APAC Whitespace" from $2bn to $4bn (i.e. growing functionality and verticles)
• Proft Margins to expand to 35% by 2030 (23.3% in FY23) "through significant economies of scale"
• ( ... and yes, yuk, total TAM $13.5bn .... for completeness)

Valuation

Plugging this info into my quick model, and treating FY30 ARR as revenue in that year (probably an over-estimate, but allowing for them to come in early, so I won't sweat the difference)

• EPS (FY30) = $1.045
• EPS CAGR 2023-2030 = 18.7%
• SOI growth og 0.5% p.a.
• Using a WACC of 10% (which is probably high for $TNE, which is more like 8-9%, but use this as an MoS) discounting back 7 years 2030 to 2024:
• P/E of 35 : Value/Share = $20.70
• P/E of 45: Value/Share= $26.60

Note: Average P/E over last 3 years has been around 47 (currently a bit spicey at 58.)

I'll put my Strawman valuation in between the two at $23.70.

Conclusion

At 7.3% of my RL ASX Portfolio, $TNE is my 3rd largest holding. Mr Market does present annual opportunities to buy, but today isn't one of them. (If the P/E fell back to around 40 - last there in Oct-22 - I'd add, and be happy to take it up to 10% weight. Who knows, maybe I'd get a little trigger-happy before then. But not today. )

Disc: Held in RL, not on SM

Short term

Executives participate in an STI plan which is based on Executive Net Profit Before Tax

"Executive Net Profit Before Tax is calculated based on Company profit before tax and before the Executive STI is deducted"

Long term

EPS Growth and relative total share holder return

"Relative TSR targets are determined with reference to our peer group. Our peer group is defined as those constituent companies making up the ASX All Technology Index (XTX). Calculations for the vesting outcomes for relative TSR vesting conditions are prepared by an independent external company."

Some initial broker responses:

• GS from $18.10 to $18.85
• Jeffries from $18.00 to $19.00
• UBS unchanged on $16.40

GS (the only one I have the full note for) assumes PBT grows at just over 17% p.a. for the next two years. Seems about right. Never blowing the lights out, but also not underperforming. Steadily growing, high quality earnings.

More to come but, overall, mostly positive commentary, but the modest changes imply more was expected.

Disc: Held in RL

$TNE have just posted their 1H results. At first glance, another reliable 6 months of delivery. Not much to say.

ASX Announcement

Their Highlights

• Profit Before Tax of $61.5m, up 17%
• Profit After Tax of $48.0m, up 16%
• Total Annual Recurring Revenue (ARR) of $423.6m, up 21%
• Net Revenue Retention (NRR) of 117%, above our target of 115%
• Revenue from our SaaS and Recurring business of $223.1m, up 21%
• Total Revenue of $244.8m, up 16%
• Total Expenses of $183.2m, up 16%
• Cash Flow Generation of ($3.8m) as expected in H1, and will be strong over the full year
• Cash and Investments of $172.0m, up 24%
• Record Interim Dividend of 5.08 cps, up 10%
• R&D Investment (before capitalisation) of $56.9m, up 15%, which is 24% of revenue
• UK ARR $28.8m, up 36%

My Observations

As first glance, a characteristically good result. Like clockwork.

Revenue and profit growth both somewhat weaker than 1H FY23 over its PCP.

However, the strategic framework and investment thesis is for $TNE to double in size every 5 years, for which it requires revenue and profit growth of 15%.

Cashflow typically weak in 1H due to seasonality in payments and receipts cycles.

With ARR at $423.6m, and 1.5 years to go, on track to achieve ARR of $500m by FY25.

So tick, tick, tick.

Investor call at 11am this morning, so I'll leave it there unless there is anything of interest on the call.

SP is more or less on its long term growth trend, so I don't expect much SP action. That said, don't care, coz this is one of the true long term holds that I don't really bother much about looking at the SP. Probably around fair value.

Disc: Held in RL

(Now my 4th largest holding; was 5th, but I have started selling down $ALU as I require the funds.)

$TNE announced their FY23 results today. It is my largest RL holding, so I attended the call, and here will bring out a few points.

Their Highlights

• Profit Before Tax of $129.9m, up 16%, beating guidance of 10%-15% growth

• Profit After Tax of $102.9m, up 16%, beating guidance of 10%-15% growth

• Total Annual Recurring Revenue (ARR) of $392.9m, up 23%

• On track to surpass $500m ARR by FY25

• Net Revenue Retention (NRR) of 119%. Above our long-term target of 115%

• Total Revenue of $441.4m, up 19%

• Revenue from our SaaS and Recurring Business of $390.7m, up 22%

• Expenses of $311.5m, up 21%

• Cash Flow Generation of $104.6m, up 36%

• Cash and Investments of $223.3m, up 27%

• Total Dividend of 19.52 cps, including a special dividend of 3.0 cps, up 15%

• R&D investment of $112.0m before capitalisation, up 21%, which is 26% of revenue

My Analysis

The results are impressive, and the highlights above speak for themselves.

Yet the market had run up in anticipation of the results - both expecting a good result given the strong 1H and as part of the wider macro pick-up in recent weeks. So, $TNE closed the day down 2%, as those who play with a shorter-term horizon took some profits. This is often the pattern with this stock.

The presentation held some interesting insights, which continue to support my thesis to continue to hold $TNE long term.

Cash generation was particularly strong, reportedly due to good performance by the collections team, with Cash Flow Generation (a number they use which is close to FCF) was 102% of NPAT – something CEO Edward Chung claimed was a year earlier than expected.

$TNE upgraded their target to hit $500m ARR by 2026 pulling it forward to 2025 – again, this was widely expected.

Net Revenue Retention was a very strong 119%, aided by pricing increases in an inflationary environment. However, even excluding the inflation effect, Edward said the result was very close to their ongoing goal of having NRR of 115%. This "target" allows the company to double revenue every 5 years, from existing customers.

Churn remains low at 1%, which was also positive. As $TNE gets to the end of the transition to a 100% cloud SaaS company, this was expected to lead to the loss of some customers on legacy platforms.

Although profit growth beat consensus, it was weaker than indicated by the strong ARR growth because costs have increased, driven by increased spending in R&D to drive development of the SaaS+ platform, and building out their full One Education offering.

Two case studies presented on Slide 25 showed where they are winning full government department ERP and whole of university ERP deals (student management, finance, HR and payroll). So, it has taken a lot of development investment to get to this point.

Consequently, PBT margins have fallen back to 30% from FY21’s high of 31%, however, Edward said that this will now gradually ramp up towards 35% over the coming years. Given the prospect of strong, ongoing revenue growth, this should turbocharge earnings growth over the next 3-5 years. 

Long Term Prospects

My thesis for long-term sustained growth rests on two pillars: 1) continued strong growth from existing customers and 2) UK as a material future growth horizon. I’ll update briefly on both.

1)   Growing Existing Customer with SaaS+ the next phase

A lot of rubbish gets written about $TNE by analysts who talk about the company’s growth slowing as they run out of room in ANZ, and today’s presentation addressed this head on.

Without going through the detail of the product suit that makes this possible(but they now have 16 products and over 400 modules), I include on chart from the presentation below that shows how $TNE’s innovation allows it to grow revenue strongly from existing customers.

Presentation Slide 29: Case Study of Existing Customer Growth

The slide shows selected case studies indicating how the transition to SaaS from the on-premises legacy drove the initial step-up in ARR, to which over time they have added new modules. Nothing new here, it’s the classic SaaS modular land and expand model.

What’s exciting is the new SaaS+ model, which is an enhanced SaaS ERP service including support for implementation and training and other services bundled around it. The offering has been developed to enable customer to adopt the service without having to use system integrators to manage the implementation. Slide 30 shows how this added value creates a new horizon of growth – one that is not yet material at the portfolio level, but which drive growth over the coming years.

Slide 30: Impact of SaaS+ (Case Example)

Edward was at pains to point out that while their competition in education and local government (including SAP) have now moved their offerings to the cloud, unlike $TNE these systems have not been designed as SaaS, cloud native products. Edward stated that $TNE have rebuilt their entire tech stack 4 times over 36 years. He claimed that no other ERP player has even ever done it once. So, they have a massive advantage against competitors in having very low technical debt. Importantly, the architecture is design for ease of implementation, as well as modular expansion.

Customers of competitors, on the other hand, generally continue to face the historical implementation challenges, including hefty consulting bills. As evidence, Edwards showed that $TNE consulting revenues actually fell 11%, which was celebrated as a good thing, demonstrating the ease clients face in implementation.

SaaS+ is proving an early hit with clients. 2023 was the first year of implementation, and they had targeted 10 deals. They delivered 34.

To show the enduring nature of the growth from existing customers, they included a cohort chart (which looks very much like what you see from $ALU and $WTC).

Slide 28 – Cohort Analysis

2)   UK is making progress

The UK is the second part of my long term growth thesis.

$TNE started operations in the UK just before the pandemic, turning a profit in the first year, 2020. (Just think about that in the context of some of our other SaaS favourites here on SM that have spent 2-3 years around the inflection point!)

In FY23, ARR was $26.5m (up 52%) and profit of $3.7m was up 54%. It is still not a material part of the business, but it is intereesting nonetheless.

See the following two charts for an overview. (They have been just a bit naughty, in that the first chart is not to a consistent scale!)

One question mark in my thesis is whether $TNE can replicate their ANZ success in the UK. Or, are they late to the party in the UK, and up against established competitors who are all now also in the cloud. (Perhaps like we’ve seen with $XRO in its international expansion, where the international business is facing slowing growth, and represents objectively a lower quality business.)

While it is still early days, the signs are promising, and the management team expressed confidence that they are going to continue the trajectory established.

The reason for the confidence is the innovation their have built into their products which beats the competitor ERP offerings in the core verticals of education and local government. In fact, examples were presented where clients using competitor on-premises products, rather than risk a painful transition to the cloud used that transition decision as the opportunity to switch to $TNE. If $TNE develops an industry reputation as offering the best customer experience for on-prem to cloud transition, then perhaps they are just in the right place at the right time.

Progress in the UK is one I am watching closely. It’s not material at the moment, but looking out over 5-10 years, it could be a very important part of the long term growth story.

Valuation

$TNE is not cheap (understatement). Based on today’s result and closing price, the p/e is 51. That’s well into the upper half of its p/e range over the last 5 years (p/e range c. 35-60).

In my basic DCF models, I get valuations ranging from $13.50 – $22.00. With a stable margin structure, it really comes down to how long and how hard you believe it can continue to grow.

I’ve plotted the last 10 years SP below, with an exponential best-fit curve overlaid. If that curve is a good approximation to fair value, then pretty much every year you can get an opportunity to buy $TNE at a 10-20% discount to fair value. That is in fact when I last topped up in early 2022. But today, I’m not a buyer.

I’m certainly also not a seller, as I have a high conviction that with continued good management, this journey can carry on for the next 5-10 years. $TNE is my largest ASX holding in RL, and second only in conviction to $WTC.

My Key Takeaways

The FY23 was good on all fronts. There is really nothing to be critical about.

This is a high-quality business, and it appears to have a good runway ahead. In truth, it is hard to know just how good the market runway ahead of it is in ANZ. They claim to be no more than 15% penetrated in any of their verticals. I am happy to judge them year-by-year on delivery. The interest for me is the early progress in the UK – a market 2-3x ANZ. They’ve started well, and if the trajectory can be sustained, then even buying at today’s price will look like a great decision in 5 years’ time.

Disc: Held in RL (7.5%) not held on SM

$TNE announced H1 results this morning, with the investor call at 11:00am.

Their Key Results

• Profit After Tax of $41.3m, up 24%

• Profit Before Tax of $52.7m, up 24%

• SaaS Annual Recurring Revenue (ARR)1 of $316.3m, up 40%

• Revenue from our SaaS and Continuing Business of $200.0m, up 18%

• Total Revenue of $210.3m, up 22%2

• Total Expenses of $157.6m, up 21%3

• Cash and Cash Equivalents of $139.1m, up 20% from 31 March 2022

• Cash Flow Generation4 of $1.3m as expected, and will be strong over the full year

• Interim Dividend of 4.62cps, up 10%

• R&D expenditure (before capitalisation) of $49.4m, up 19%, which is 24% of revenue

• UK profit of $3.0m, up 29% 

My Further Observations

With SaaS growing strongly and now the dominant revenue component, $TNE is forecasting a one-off unusally high annual churn of 1.6%, due to its End of On-Premises milestone later this year. Regardless, it is forecasting NRR of 115%-120% for the FY.

In reviewing the results it is important to recognise the historical pattern that cash receipts are stronger in H2, due to payment seasonality.

New SaaS large enterprise customers increased 27% to a total of 903.

All industry verticals are growing ARR strongly, with above average growth in the three smallest segments: Health and Com (+23%), Asset & Project Intensive (+28%), and Fin Serv. & Corp. (+33%). Only Government was significantly below average at +12% (vs. Group 22%). Strategically, if this trend continues, it will over time mark a further diversification in $TNE's customer base, and indicates a broader market appeal for its products.

The UK business is continuing to grow profitably with PBT up 29%, ahead of the group growth of 24%. UK is only making a small contribution to 1H FY23 profit of $3.0m in the total of $52.7m.

Overall, $TNE says it is on track to achieve $500m+ ARR by FY26. No change.

Wide range of guidance given for PBT growth for the FY of 10-15%. (Note: some commentators consider this guidance as conservative, expecting a "beat" in November.)

They re-iterated their view that SaaS-enabled economies of scale will see margins expand from 30% (32% ex-Scientia impact) to 35% over the coming years.

My Key Takeaways

$TNE continues to consistently deliver with nothing exceptional in this report.

Results are broadly in line with market consensus and the shares appear fully priced for the march to FY26. Of course, outperformance could drive further upside. Given this, I have recenltly halved my $TNE position, to deploy capital to holdings were I see greater upside opportunity. Of course, I'll be happy to pile back in should the market offer any opportunity!

I'll be listening for an update on the cyber breach on the call. No reference to this in the release or the slides.

Disc. Held RL (3.0%);not held in SM

Upfront about the Back Office incident.

to Add: TechnologyOne will update the market on its performance and outlook with the release of its 1H 2023 financial results on 23 May 2023.

Threatened - internal Microsoft 365 back-office system. 

Trading Halt:

TNE Acquisitions History

·      September 2021 Scientia Approx GB£12 million - Scientia’s market leading product Syllabus Plus provides advanced academic timetabling and resource scheduling. Their products provide mission critical software for over 150 leading Universities across the United Kingdom, and Australia including the University of St Andrews, University of Exeter, Monash University and the University of Queensland. https://www.asx.com.au/asxpdf/20210903/pdf/45043zzkw45z0d.pdf

·      October 2015 Jeff Roorda and Associates (JRA) approx. $10m - This acquisition supports our strategy of providing innovative and relevant solutions that offer deep, enterprise wide, functionality for local government, government and asset intensive organisations. Established in 1993 to specialise in asset management planning for government infrastructure, JRA is recognised nationally as a leader in local government reform in the areas of asset management, capacity building and financial management. JRA’s strategic asset management solution provides long-term planning, risk management and performance optimisation strategies for critical public infrastructure assets including roads, drainage, buildings, pipe networks, mechanical and electrical plant. https://www.asx.com.au/asxpdf/20151002/pdf/431tf708yjrxth.pdf

·      May 2015 Desktop Mapping Systems Pty Ltd Approx $12m - DMS’s software allows for the storage, retrieval and management of spatial data, which is critical for these sectors, and will play an important part in delivering our enterprise software as a service to our customers on the TechnologyOne Cloud. This acquisition will allow us to easily and deeply embed spatial data with enterprise data such as property and assets. It also opens up innovative possibilities to use spatial data in ways that have not previously been possible. https://www.asx.com.au/asxpdf/20150508/pdf/42yg4bq3x59rz1.pdf

·      January 2015 ICON Stategic Solutions Pty Ltd $10m - providing innovative and relevant solutions for the local government sector. The unique IP and specialist functionality we are acquiring with ICON supports our vision of enabling councils to interact with their communities efficiently through online and digital channels. https://www.asx.com.au/asxpdf/20150130/pdf/42w9p22g1s45k4.pdf

*Previous acquisition before 2014 not included

Technology One (TNE) released FY22 results (Sept year end). From their release:

• Profit After Tax of $88.8m, up 22%
• Profit Before Tax of $112.3m, up 15%, at the top end of guidance
• SaaS Annual Recurring Revenue (ARR) of $274.2m, up 43%
• Total Annual Recurring Revenue (ARR) of $320.7m, up 25%
• Total Revenue of $369.4m, up 18%
• Revenue from our SaaS and Continuing Business of $358.7m, up 22%
• Expenses of $257.1m, up 20%
• Cash Flow Generation of $77.2m, up 21%,
• Cash and Cash Equivalents of $175.9m, up 22%
• Total Dividend of 17.02cps, including a special dividend of 2.0 cps, up 22%
• R&D investment of $92.2m before capitalisation, up 19.6%, which is 25% of revenue

Another fantastic year for TNE with NPAT growth of 22%. Management have had long term targets of $500m+ in ARR by 2026 and also to double the business every 5 years (implying 15% CAGR).

I have updated my valuation on Strawman to reflect these results. I still think the current share price is a bit expensive and have sold my shares in my real life portfolio but continue to hold on Strawman. However TNE is definitely one of the highest quality business' on the ASX and a company I will look to re-enter at the right price.

Full Announcement Here

Full Presentation Here

Full Report Here

Disc: Held on Strawman. Not held IRL.

29-Nov-2021: Technology One (TechOne, ASX:TNE) released their FY21 full year results on Tuesday morning last week, and their SP dropped -2.86% (or -37 cps) on the day, then their SP dropped another -8.61% on Wednesday (24 Nov) as two brokers downgraded their calls on TNE. Macquarie dowgraded TNE from "Neutral" to "Underperform" with a new $11 TP (target price) and UBS dowgraded TNE from "Neutral" to "Sell" with an $11.90 TP. It didn't seem to help that Morgans maintained their "Add" call on TNE with a $13.73 TP (raised from their previous $10 PT). The other broker covered by fnarena.com who covers TNE is Credit Suisse who maintained their "Neutral" rating with a $12 PT. See below:

I note that as of right now (around 3pm on 29-Nov-2021), fnarena.com have not yet added TNE's FY21 numbers to those graphs in the top half of that screenshot. The broker updates at the bottom ARE up to date however. (As of today at least)

Here's some more detail:

Macquarie - 24/11/2021, Downgrade to Underperform from Neutral, Target: $11.00, Loss to target $-0.47

Following FY21 results for TechnologyOne, Macquarie raises its FY22-24 EPS forecasts by 10%, 15% and15%, respectively, due primarily to lower opex. The broker lifts its target to $11 from $9.20 and notes solid momentum in the SaaS transition.

However, Macquarie reduces its rating to Underperform from Neutral after comparing multiples for domestic and overseas peers. Management's lower revenue growth forecast was also taken into account.

Target price : $11.00 Price : $11.47 (24/11/2021) Loss to target $-0.47 -4.10%

(excluding dividends, fees and charges - negative figures indicate an expected loss).

UBS - 24/11/2021, Downgrade to Sell from Neutral, Target: $11.90, Gain to target $0.43

UBS assesses a solid FY21 result for TechologyOne though downgrades its rating to Sell from Neutral after a 30% share rally in the last three months. The profit result was a 1% beat versus the broker and towards the top end of guidance, primarily due to cost efficiencies.

Management reiterated the FY26 $500m annual reccuring revenue (ARR) target, after progress on SaaS transitions during 2H21, points out the analyst. The broker lifts its target price to $11.90 from $11.70.

Target price : $11.90 Price : $11.47 (24/11/2021) Gain to target $0.43 3.75%

(excluding dividends, fees and charges - negative figures indicate an expected loss).

Morgans - 24/11/2021, Add, Target: $13.73, Gain to target $2.26

TechnologyOne's profit result was in line with Morgans' forecast and towards the top end of the guiidance range. Both revenues and expenses were lower than forecast but tight cost controls supported earnings.

The transition of customers to SaaS continues with SaaS annual recurring revenue up an "impressive" 43% year on year. The legacy on-premise business will be disconinued in 2024 and management remains comfortable with its $500m SaaS ARR target for 2026.

Add retained, target rises to $13.73 from $10.00.

Target price : $13.73 Price : $11.47 (24/11/2021) Gain to target $2.26 19.70%

(excluding dividends, fees and charges - negative figures indicate an expected loss).

Credit Suisse - 24/11/2021, Neutral, Target: $12.00, Gain to target $0.53

Credit Suisse increases its target price for Technology One to $12 from $9.50, following FY21 results that came in at the high-end of guidance. Despite a lack of near-term catalysts, the analyst now expects sustainable double-digit profit growth.

By FY24, the broker forecasts a 35% profit (PBT) margin. End of on-premise support is planned for October 2024, which should accelerate the completion of the shift to SaaS. 

In the longer term, the broker weighs positive drivers (product and geographic penetration) versus increased competition. Neutral rating maintained.

Target price : $12.00 Price : $11.47 (24/11/2021) Gain to target $0.53 4.62%

(excluding dividends, fees and charges - negative figures indicate an expected loss).

--- end --- Source: fnarena.com

The TNE share price was then up +4.27% (or +49 cps) on Thursday, then down -3.34% (or -40 cps) on Friday, and now today they are up +44 cps (or +3.81%) so far, so trading at exactly $12/share as I type this, and they have been as high as $12.19 earlier today. I couldn't really understand the market's negative reaction to the TNE results last week, however it is good to see TNE rising today in a falling market. The cream rises to the top when all is said and done. And TNE is the cream of the ASX IMHO. Disclosure: I hold TNE in multiple RL portfolios as well as here on SM.

As I have stated before, including in my valuation for TNE, they have managed to double their revenue and profits (+100% as a minimum) in a five year period three times already:

Their share price (SP) has reflected that:

30-Nov-2005: $0.57

30-Nov-2010: $0.96

30-Nov-2015: $4.35

30-Nov-2020: $9.18

Today (29-Nov-2021): $12.

As they explained on Tuesday last week:

$500m+ ARR by FY26 - With our fast-growing SaaS business and the announcement of the end of our On-Premise business, we are on track to hit our target of $500m+ ARR by FY26. Given the current ARR is $257.5m, this is an additional $242.5m of Annual Recurring Revenue in the next 5 years.

Revenue from SaaS & Continuing Business was up 9% [in FY21]. This is our future state business. By FY24 we expect our total business to be growing by 15%+ per annum.

Some people might call this optimistic, but TNE have a track record of achieving their own ambitious targets.

Rudi put it best: https://www.fnarena.com/index.php/2020/12/03/rudis-view-be-respectful-of-the-past/

I agree with Rudi that TNE is one of the best quality companies available to invest in on the ASX, and has been for a number of years. If you are after good growth year after year and a company that sets ambitious targets and then hits those targets, then TNE fits the bill perfectly.

That said, I'm possibly not going to be topping up here at these levels because I last bought TNE shares in January 2021 (this year) at $7.74, and they had significantly more shorter and mid-term upside from those sub-$8 levels than do up here at around $12/share, plus I have a large enough weighting to the company already, particularly considering the capital growth I've enjoyed. If I was underweight TNE shares however, these levels would look pretty good if you take a medium to longer term view, say 3 to 5 years.

Sample photo from their media kit - see here: Media Kit - TechnologyOne (technologyonecorp.com)

Edward Chung (CEO & MD) and Adrian Di Marco (Company Founder, Executive Director and Executive Chairman).

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.

Management has guided for FY21 Net Profit Before Tax of $94.3-$98.6m, representing a 10-15% increase on the FY20 underlying result. Perpetual licence fees are expected to decline by $7m as the focus remains on growing the SaaS business. As a result, SaaS's annual recurring revenue is expected to grow by at least 35% on FY20. Consensus currently has expectations of ~10.9% EPS growth (GR3). Furthermore, the ~£12m acquisition of UK higher education software provider, Scientia, is expected to be earnings neutral for FY21.

*Scientia provides mission critical software for over 150 leading universities across the UK and Australia

Disc: RL, not in the SM portfolio,

03-Sep-21:  Acquisition of Scientia - UK’s Leading Higher Education Software Provider

BRISBANE, 3 September 2021 – TechnologyOne (ASX: TNE), one of Australia’s largest enterprise Software as a Service (SaaS) companies, today announced it has entered into an agreement for the acquisition of Scientia Resource Management Limited (Scientia), a United Kingdom company servicing the higher education sector.

The likely consideration will be GB£12 million and includes an initial payment of £6m and further payments, based on achieving progressive earnouts out to FY23. Total consideration will be in the form of cash payments funded from internal sources. The acquisition is earnings neutral for FY21.

Edward Chung, TechnologyOne’s CEO said, “This acquisition forms part of our strategic focus to deliver the deepest functionality for Higher Education and it will accelerate our growth and competitive position in the UK as well as have significant benefits in the Australian Higher Education market.”

“Scientia’s market leading product Syllabus Plus provides advanced academic timetabling and resource scheduling. Their products provide mission critical software for over 150 leading Universities across the United Kingdom, and Australia including the University of St Andrews, University of Exeter, Monash University and the University of Queensland”

“The acquisition further expands our Global SaaS ERP solution for Higher Education. The integration of the Scientia’s advanced academic timetabling and resource scheduling capabilities, combined with our market leading Student Management, HR & Payroll, Enterprise Asset Management and Finance capabilities, will provide smarter decision-making eliminating underutilisation of space and resources that is paramount for Higher Education across the globe in a post-covid world” Mr Chung said.

Adrian Di Marco the company’s founder and Executive Chairman said “This is our first international acquisition and demonstrates our deep commitment to both Higher Education and the UK market. The unique IP and marketleading functionality of Syllabus Plus supports our vision of delivering enterprise software that is incredibly easy to use and that substantially enhances our customers’ experience in the Higher Education sector. We are excited about the opportunities this will bring to both our UK and Australian customers in the coming years.”

More details will be provided with our full year financial statements and results presentation.

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I hold TNE in one RL PF and also in my SM PF.  They tend to trend well and they are a good one to either buy and hold, or to buy low and sell high.  I'm tending towards the buy and hold strategy with TNE now.  They have been an excellent performer in terms of business KPIs for a long time, and while they may not have the explosive growth potential of a new start-up or a disruptor, they are also a LOT less risky - there is far LESS downside with a company of this quality that have a track record that is this good.  I like investing in smaller companies, but the spine or core of my RL portfolios tend to be larger, high-quality, proven companies like TNE, CSL, ARB, etc.  Those provide the core growth and stability - and allow me to also play in the smaller end of the market with a smaller percentage of my investable capital - where there is a different (higher) risk/reward equation.

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.

25-May-2021:  TechnologyOne SaaS up 41% & H1 FY21 Profit After Tax up 48%

plus:  TNE H1 FY21 Half Year Results Presentation

and:  Half Year Report 2021 - Amended

Key results were as follows: 

• Profit After Tax of $28.2m, up 48%
• Profit Before Tax of $37.3m, up 44%
• SaaS Annual Recurring Revenue (ARR)* of $155.8m, up 41%
• Revenue from our SaaS and Continuing Business of $140.6m, up 7%
• Total Revenue of $144.3m, up 5%
• Expenses of $107.4m, down 5%
• Cash and Cash Equivalents of $100.1m, up 20% from 31 March 2020
• Cash Flow Generation** of ($2.9m) as expected, and will be strong over the full year
• Dividend of 3.82cps, up 10%
• R&D expenditure (before capitalisation) of $34.6m, up 14%, which is 24% of revenue

Notes:

1. (*) ARR represents future contracted annual recurring revenue at period end. This is a non-IFRS financial measure and is unaudited.
2. (**) Cash Flow Generation is Cash flow from operating activities less capitalised development costs, capitalised commission costs and lease payments. This is a non-IFRS financial measure and is unaudited.

[I hold TNE shares.]

Proxy Advisor Recommendation Against TNE Rem Report

Introduction

Proxy reports have been recently issued pertaining to Technology One Limited’s (ASX:TNE) Remuneration Report as follows:

~ CGI Glass Lewis – recommendation vote against Remuneration Report

~ Ownership Matters– recommendation vote against Remuneration Report

~ ISS - recommendation vote in favour of the Remuneration Report

The recommendation against the Remuneration Report is because the TechnologyOne Board exercised discretion pertaining to LTIs, that resulted in LTIs fully vesting.

TechnologyOne has been approached by Shareholders on this matter. We have issued this ASX statement to ensure all our shareholders are fully informed.

TechnologyOne believes that the recommendation by the Proxy Advisors does not take into account the real-world considerations faced by the TechnologyOne Board, as outlined below. (see attachment)

Board discretion occurred to avoid unintended and unfair consequences that would have had a profound impact on executive motivation and retention.

The Board believes executives should be acknowledged and rewarded for the exceptionally strong outcomes delivered during COVID19. Board discretion has not led to an unreasonable outcome. There is a clear alignment between shareholder rewards and executive remuneration after Board discretion.

We ask shareholders to consider the following information and vote in favour of adopting the Remuneration Report at the upcoming AGM.

28-Jan-2021:  UBS, the only broker to have been bearish on TNE, has just double-upgraded TNE from a "Sell" to a "Buy" - quite a turnaround!  Which means TechOne is one of the few stocks rising today amidst a sea of red.  Here's a summary of what UBS said:

UBS - 28/01/2021:  Upgrade to Buy from Sell:  Target: $9.15:  Gain to target $0.69

In the wake of TechnologyOne's recent de-rating, the broker has double-upgraded to Buy from Sell. The stock has underperfomed the Small Ordinaries by -15% since its November earnings result, and -25% since the prior May result.

The broker sees upside risk from faster SaaS conversion, improving UK momentum and greater traction in domestic state/federal government business. Value is on offer compared to both domestic and foreign peers, the broker suggests.

Target rises to $9.15 from $8.45.

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Macquarie has the same price target ($9.15) with a "Neutral" rating.  Morgans has a $9.99 PT and a "Buy" call on TNE.  I hold TNE shares, and they are also one of the largest positions on my Strawman.com scorecard currently.  I was lucky enough to buy them two weeks ago at $7.74/share, at very close to the bottom of their recent decline.  They're heading north again now.  If you have a quick glance at their chart you'll see that they trend very well for months at a time and then reverse direction and trend the other way.  It's a different type of volatility, like volatility in slow motion.  They don't tend to move up and down by large percentages on a day to day or week to week basis, but they have these longer trends - for 2 to 4 months at a time - where they just head North-East or South-East at a steady clip.  About a week ago they started their next North-East leg.  In addition, as I have explained in my valuation and bull case straw, they are one of the most dependable and highest quality companies on the ASX.

[I hold TNE.]

13-Jan-2021:  The best bull case I've read for TNE is here:  https://www.livewiremarkets.com/wires/be-respectful-of-the-past

That's Rudi Filapek-Vandyck from FNArena.com and if you've followed him on Ausbiz's "The Call", you'll know he's a big fan of TNE.

Here's another one:  Mark Moreland of TeamInvest:  https://www.ausbiz.com.au/media/the-call-monday-11-january?videoId=6479

Our own Strawman (Andrew Page) asks Mark about TNE from about the 5:30 mark of that video.  I wouldn't worry too much about Ord Minnett's Francesco De Stradis' concerns about lack of growth, etc, in the coming years.  As Rudi and Mark say, TNE's management are so good, and their track record is so brilliant, that you'd be wise to keep backing them rather than expect their excellent run to come to an end.  Francesco tows the company line, so if Ords have a "buy" on the stock he'll be positive, and if they don't he'll be wary.  That's fine.  Horses for courses.  I tend to listen more to those who clearly know what they're talking about, those who really KNOW the company they are discussing - and ignore the rest.  

Disclosure:  I hold TNE shares, and if they stay below $7.80 tomorrow I plan to buy more (for my superannuation portfolio).  I'm also planning to add them to my Strawman.com scorecard this week.

I've presented my own bull case in my valuation for TNE, so I won't repeat it all here.