TechnologyOne shares rising higher after strong half-year results

TechnologyOne (ASX: TNE) shares have risen by more than 10% over the past five days after releasing a strong set of half-year results that could set the company up for further growth through 2024 and beyond. For context, the stock has risen by 149% over the past five years.

The company is Australia’s largest ERP (enterprise resource planning) software as a service (Saas) company and focuses on the research and development of new and emerging technologies, including cloud-based technology, artificial intelligence and machine learning. Its Australian-owned R&D centre is the largest of its kind and the company also has facilities in Malaysia, Indonesia and Vietnam.

TechnologyOne: half-year results

The ASX 200 tech business, reporting figures to 31 March 2024, reported its 15th straight year of record first half profit, record revenues, and record SaaS fees.

Profit before tax rose by 17% year-over-year to $6.5 million, while total annual recurring revenue also leapt by 21% to $423.6 million. The company also beat its net revenue retention target by 2 percentage points at 117% — and total revenue increased by 16% to $244.8 million.

While cash flow generation was a negative $3.8 million, this was expected and the company considers cash flow will be ‘strong over the full year.’ TechnologyOne also spent $56.9 million on research and development in the period, a 15% increase year-over-year, representing 24% of revenues.

The UK was a particular highlight, with annual recurring revenue up by some 36% to $28.8 million.

Where next for TechnologyOne shares?

CEO Ed Chung enthused that ‘Traditionally, TechnologyOne's cash flow generation is weighted to the second half, aligned with customer anniversary payment dates. This half year, we delivered a close-to-break-even cash flow generation result, with cash and investments up 24% versus pcp.’

But it’s not just the CEO with positive words on the company’s outlook. Morgans analysts now rate the stock as an ‘add’ with a $20.50 price target — and argue that the company could accelerate profit growth from between 10% and 15% to between 15% and 20% per year, driven by the its unique business model, software quality, and large market opportunity.

Bell Potter analysts are also optimistic, noting that ‘the positive surprise of the result was the full year guidance of 12-16% PBT growth whereas Technology One historically has typically provided guidance of 10-15% growth. The company also said the full year PBT margin would increase by c.100bps which suggests a figure of 30.7%.’

The analysts have reaffirmed their previous ‘buy’ rating, and upgraded their price target to $19.

The ASX 200 company has doubtless benefitted from wider artificial intelligence boom, but enterprise resource planning is arguably becoming ever more critical for large businesses as their operations become more complex.

TechnologyOne may appear positioned for growth because the world has changed. In the past, large companies have been required to invest significant capital into their own systems, including hardware and infrastructure. With TechnologyOne, these systems have moved to the cloud, and the result is more efficient process for both clients and the company’s bottom line.

Of course, many heritage companies have attempted this shift, but TechnologyOne is succeeding. Chung noted that the results ‘validate the strength of our SaaS strategy, which continues our strong growth trajectory in both Australia and the UK.’

On a macro level, there is also hope that the cash rate — which stands at 4,35% — may start to fall over the next few months, enabling faster growth. And for perspective, the interim dividend paid out for last half rose to 5.08 cents per share.

Past performance is not an indicator of future returns.

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