TechnologyOne Reaffirms Strength

Australia | Nov 25 2020

TechnologyOne provided a solid performance over FY20, despite the pandemic and extra provisioning, although several brokers remain wary of valuation

-Has the inflection point in cloud conversion arrived?
-Reaffirmed strength in government, education software
-UK reaches break even


By Eva Brocklehurst

Cash flow, strong cost controls and profit margins stood out in FY20 as TechnologyOne ((TNE)) performed impressively despite the impact of the pandemic and the need to take extra provisioning.

The business has evolved as software-as-a-service (SaaS) and Morgans assesses the transformation period is almost over. Legacy revenue declined -34% and double-digit revenue growth should start to be more apparent in the next several years.

Morgans was impressed with the results given the damage from the pandemic, calculating that after including rental expenses, free cash flow was $54.2m or 82% of normalised net profit. Revenue growth of 4% may appear weak but the broker suspects this is a function of the transition to SaaS. In contrast, at $58.7m free cash flow was up 52% for the year.

In FY20 around 70% of total revenue was recurring and, classing consulting in this way, Morgans calculates 90% of revenue is now recurring. Shaw and Partners agrees the inflection point has finally arrived, and without the pandemic the results may have been even better.

Reported pre-tax profit rose 8% to $82.5m in FY20, at the lower end of the guidance range, as TechnologyOne found it necessary to make a rare downgrade in October after a court ruled adversely in a case brought by a former employee.

Yet, profit margins were a highlight, rising to 27.6%. A final dividend of 9.41c was declared. No specific guidance was provided but the company did indicate it expects further strong profit growth in FY21.

Macquarie also hails strong cost control, noting second half operating expenditure was down -19% half-on-half. Employee costs were down -11% while capitalised R&D increased to $37.1m. The education vertical held up better than feared and Macquarie flags commentary regarding a robust tender outlook.

Wilsons considers the results have reaffirmed the nature of the company's "mission-critical" software for education, government and local councils. The company has a track record of meeting or beating guidance and the migration to the cloud remains intact, only slowing modestly.

Given the resilience of the government sector over the last 18 months, Wilsons is confident TechnologyOne will continue to capture its share of opportunities. Around 86% of FY21 revenue is already contracted.

UBS also highlights momentum in federal government business, an area which can be improved given TechnologyOne has a lower penetration compared with the local government and education sectors.

Targets Delayed

TechnologyOne did draw out its recurring revenue target of $500m, to FY26 from FY24. This was the main detractor in the results for several brokers, given most businesses have rapidly adopted the cloud and SaaS.

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