Confidence Grows In TechnologyOne

This story features TECHNOLOGY ONE LIMITED. For more info SHARE ANALYSIS: TNE

TechnologyOne is confident in the outlook for FY19, expecting robust growth in annualised recurring revenue and profit.

-Increasingly confident in achieving 1000 cloud customers by FY22
-Cloud business expected to enhance the quality of revenue
-UK expected to break even in FY19
 

By Eva Brocklehurst

TechnologyOne ((TNE)) surprised most brokers with a very solid FY18 performance and growth ahead of expectations. Net profit increased 15% to $51m. Margins improved around 100 basis points, supported by operating leverage in the cloud and more appropriate cost bases in consulting.

The company assesses the work outlook for 2019 will remain robust and growth should occur in annualised recurring revenue and profit. The operating earnings margin (EBITDA) of 22.3% was the highest level reported in a decade, signalling the benefits of scale.

Operating cash flow was slightly weaker than several brokers expected, largely because contracts in Australia and the UK were signed late in the period. Growth in annual licence fees accelerated, which is considered to well for FY19. Software-as-a-service (SaaS) platform revenues grew 56%.

Wilsons likes the increasing quality in revenue, as recurring revenue, which grew by 22% over FY18, supports around 50% of its FY19 estimates. UBS points out the stock's valuation has not de-rated in line with global peers and evidence of an acceleration in operating momentum is required to support a more positive view at current levels.

Industry feedback supports a strong profile for the medium to longer term, Macquarie asserts, across the core government and education verticals in the Asia-Pacific region. FY18 licence fees were mainly attributed to local government (45%), education (20%) and government (17%).

The company's leading position in local government continues to interest brokers, as 11 new major deals have been signed worth $80m in contract revenue. TechnologyOne has over 300 councils as customers.

Cloud Future

Management appears increasingly confident about the momentum in its cloud business, as well as its ability to deliver on the step change required to reach 1000 customers by FY22. Migration of new and existing customers to the cloud underpins Ord Minnett's positive investment view. The cloud should expand the addressable market and improve the quality of revenue, and the broker reiterates a Buy rating.

UBS asserts the company is well-positioned to take a goodly share of the transition to the cloud because its product is modular and able to be configured. The benefits from the shift to the cloud include stickier revenues and improved margins. The broker believes growth can continue at over 15% for the next three years. The company is estimating $143m in recurring cloud services fee revenue by FY22.

UK

The UK business was the main drag, with a -$3.8m loss in FY18. Losses were edging lower in the second half and the company expects a turnaround over FY19, targeting break-even. Higher UK consulting losses were offset by a turnaround in the Asia-Pacific consulting business but success in the UK market would provide brokers with more confidence that the company can succeed in large offshore jurisdictions.

Wilsons, not one of the eight brokers monitored daily on the FNArena database, acknowledges costs in the UK are being managed well and the business is on a path towards profitability, but finds the valuation and overall market backdrop prevents a more constructive stance. The broker has a Hold rating and $5.00 target.

As more customers purchase or move to the company's SaaS product the up-selling opportunity increases, Macquarie suggests. Growth in SaaS and the UK business remain the key catalysts, in the broker's view, with the stock considered fairly valued at present.

Morgans suggests the risk for TechnologyOne is not necessarily operational, but rather lies with the potential for investor sentiment to swing back and forth, pointing to the rapid de-rating of technology stocks over the last month.

The database has three Hold ratings and one Buy (Ord Minnett). The consensus target is $5.59, signalling 1.0% upside to the last share price. Targets range from $5.01 to $6.00.

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