The TechnologyOne Ltd (ASX: TNE) share price is under the spotlight after reporting its FY24 half-year result.
TechnologyOne provides software for businesses, government agencies, local councils and universities. It is focused on its software as a service (SaaS) enterprise resource planning (ERP) solution.
HY24 result
The company reported the following numbers for the six months to 31 March 2024:
- Total revenue rose 16% to $244.8 million
- Total annual recurring revenue (ARR) improved 21% to $423.6 million
- Net profit after tax (NPAT) up 16% to $48 million
- Cash flow generation of negative $3.8 million
- Interim dividend up 10% to 5.08 cents
One of the key drivers of the business was its net revenue retention of 117%, which was above its target of 115%. That means its existing client base has increased its spending with TechnologyOne (at a rate that’s higher than the goal).
It continues to win clients, with new partners including Newcastle City Council and TAFE WA.
The company is investing heavily in research and development, which increased by 15% in this result to $56.9 million, representing 24% of revenue.
TechnologyOne’s shift to SaaS-subscription style revenue is getting closer to completion. It reported revenue from its SaaS and recurring business was $223.1 million, up 21%.
The UK business is growing at a particularly quick pace, with a 36% increase of UK ARR to $28.8 million. As this division grows, it can have a greater influence on the TechnologyOne share price.
TechnologyOne’s cash flow generation is weighted to the second half, aligned with customer anniversary payment dates. It’s expecting cash flow to align with net profit after tax.
Outlook for the TechnologyOne share price
The company said it’s on track to surpass $500 million of ARR by FY25, which was brought forward at the FY23 annual result.
TechnologyOne has guided its profit can rise between 12% to 16% in FY24 thanks to strong ARR growth of between 15% to 20%. It’s also expecting the net profit before tax margin to improve by approximately 1% in the full year.
In the longer-term, the ASX share is expecting its economies of scale of the global SaaS offering to help the profit before tax margin increase to at least 35%. As the margin grows towards this level, profit can grow faster than revenue (which is growing strongly).
TechnologyOne is a great business and it’s worthy of a high price/earnings (P/E) ratio, but there’s a question of what’s a fair/good price. The market knows how good this business is. I’d be willing to buy a few shares today and buy more at a cheaper multiple of earnings.
