End in Sight for TechnologyOne Transition

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TechnologyOne has set its sights on an end goal for its software as a service transition, with some big goals to follow.

-Strong results continue to support TechnologyOne’s software as a service transition
-Analysts divided about valuation at current share price
-Big recurring revenue targets have been set post transition

By Danielle Austin

The transition to a software as a service (SaaS) provider has continued throughout FY21 for TechnologyOne ((TNE)), with the company reporting growth in its SaaS segment has driven transition momentum. Having guided to SaaS annual recurring revenue growth of more than 35%, the company reported 43% growth for the year as it continues to convert customers to its SaaS platform.

TechnologyOne's SaaS platform provides enterprise resource planning software and software support. To date the company has transitioned around half of its customers to a cloud-based SaaS platform, with the rest still accessing legacy on-premise services. Notably, recent commentary suggests larger clients are now being transitioned to off-premise services

Metrics in the company’s FY21 result were largely positive, with SaaS annual contract value up 43% year-on-year to total $192.3m, compared to guided growth of 35% for the year. Remaining customers yet to be transitioned away from on-premise services represent approximately a further $178m to the company in SaaS annual contract value.

Profit before tax was up 19% to $97.8m driven by a margin of 31.6%, while revenue of $312m represented 4% year-on-year growth, with any miss in revenue growth attributed to lower on-premise initial license fees, indicating further positive movement for the company’s transition away from on-premise services.

Big goals for a pure software as a service company

With an end to its transition period in sight, TechnologyOne has its sights firmly set on achieving annual recurring revenue as a pure SaaS company of $500m in FY26. Based on current transitioned customers, and an expected additional annual contract value benefit of $178m from customers yet to transition, additional customers and expansion will need to address a $130m gap to meet the target.

The company does have a successful track record of sustained growth, with results in the last quarter representing rewards from strategy set in place over five years ago, and notably continues to achieve growth with incremental cost increases.

Despite largely positive commentary on TechnologyOne’s outlook, analyst recommendations are a mixed bag with some downgrading ratings given the company’s recent share price run and current valuation, while others see remaining value at the current share price.

Bell Potter retains a Buy rating and a target price of $15.00. Bell Potter analysts also reiterated profit before tax growth forecasts of 16%, 17% and 17% for FY22, FY23 and FY24 respectively, noting it expects a growth range of 15-20% moving forward, compared to the traditional 10-15% growth rate.

Shaw and Partners downgrades its rating to Hold from Buy given recent strong share price performance, but increases the target price to $11.75 from $10.00.

Wilsons retains a Market Weight rating and increases the target price by 14% to $12.08 with modest adjustments to forecasts.

Macquarie downgrades the rating to Underperform from Neutral and increases its target price by 20% to $11.00, noting the valuation appears stretched considering the lower revenue growth forecasts compared to peers. The broker upgrades earnings per share forecasts 10%, 15% and 15% through to FY24 given lower expected operating expenditure and increases revenue 3-5% for the same forecast period. 

Credit Suisse retains a Neutral rating and increases its target price to $12.00 from $9.50. Earnings per share forecasts increase 4%, 8% and 13% in FY22, FY23 and FY24, with low single digit increases to revenue in the forecast period. Credit Suisse analysts assume business strength in positioning to complete the SaaS transition drove the re-rate through 2021, but expect this is now complete.

Morgans retains an Add rating and increases its target price to $13.73 from $10.00. While Morgans notes share price has already has a strong run, it believes value remains for investors willing to back the company’s double digit organic growth story.

UBS downgrades the rating to Sell from Neutral but increases the target price to $11.90 from $11.70, noting the rating downgrade was attributed to 30% growth in the share price in the last three months. Earnings per share forecasts increase 3%, 4% and 2% through to FY24 on reduced operating costs.

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