ASX tech shares often have the potential to deliver great returns because of their strong margins and cheap operating costs.
Businesses that need a lot of money to expand can take a while to grow. It takes a lot of capital to build a new manufacturing facility or build up a logistics network.
But, ASX tech shares that provide software have the ability to achieve very high gross profit margins. That enables them to spend a lot more of the revenue on growth expenditure (such as marketing or research & development).
Volpara Health Technologies Ltd (ASX: VHT)
Volpara provides breast cancer screening software for healthcare providers which helps them analyse images, identify risk and helps health professionals operate more efficiently.
The recent FY23 result saw Volpara’s gross profit margin improve by 122 basis points (1.22%) to reach 92.5%. That’s a great signal for future profitability.
Subscription revenue grew by 35% to NZ$33.6 million, while operating expenses only increased by 7% to NZ$46.2 million. Overall, the operating loss improved 31% to NZ$11.2 million and underlying EBITDA (EBITDA explained) jumped 57% to NZ$6.1 million.
The ASX tech share is getting close to breakeven. I think the outlook looks promising, it can grow its revenue per user, expand into new markets and tap into its lung cancer screening division, which is still small.
Megaport Ltd (ASX: MP1)
Megaport is a software company that enables customers to connect their network to other services on the cloud, through Megaport’s network.
The business is already generating positive EBITDA and it’s steadily rising every quarter. In the third quarter of FY23 it made $7.2 million of reported EBITDA.
Megaport recently increased its prices for customers, after an increase in its costs. But, the revenue boost from this change was stronger than expected with a lower-than-expected churn of services by customers, demonstrating the “stickiness” of its services.
It is currently working through a program of cost cutting. Megaport has already delivered a total of $3 million in annualised cost savings, while another $4 million has been identified, with the savings expected to be fully achieved during FY24.
In the third quarter of FY23, the ASX tech share grew its monthly recurring revenue (MRR) grew 14% quarter on quarter to $14.1 million.
In FY24, normalised EBITDA is expected to grow to between $41 million to $46 million, up from FY23’s guided range of $16 million to $18 million. I think the ASX tech share’s profitability is going to soar over the next few years.
