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Technology One Limited (ASX:TNE) shares crash lower on half-year results release

The Technology One Limited (ASX: TNE) share price has crashed lower this morning following the release of its half-year results.

In early trade the enterprise software company’s shares are down 9% to $4.50.

What happened in the first-half?

This morning Technology One reported half-year net profit before tax of $10.4 million on revenue of $120 million. This was a 1% and 6% increase, respectively, on the prior corresponding period.

The main drivers of its top line growth were a 14% increase in total annual recurring revenue and a 51% in annual SaaS platform contract value. Annual licence fees rose 6% and initial licence fees climbed 7% during the period.

On the bottom line this led to earnings per share of 2.55 cents, up 2.4% on the 2.49 cents per share achieved in the prior corresponding period.

As I mentioned earlier today, the market was expecting earnings per share of 2.8 cents per share. This would have been growth of around 12%, which explains why its shares are sinking lower today.

However, the company’s CEO, Edward Chung, appeared to be pleased with the half. He stated that:

“This half Technology One has delivered record revenue, record licence fees and continuing very strong growth in our cloud business. Technology One is on track to deliver profit growth of between 10% to 15% over the full year.”

As Chung pointed out, the star of the show in my opinion was the company’s Cloud business. It delivered a profit of $3 million during the half, up 217% on the prior corresponding period. In light of this, management upgraded its Cloud business profit guidance for the full-year from $5 million to $7 million.

Should you invest?

Based on this result and its last close price, Technology One’s shares were trading at 35x trailing earnings.

While I do believe that its Cloud business has significant long-term growth potential, I’m not convinced that 10% to 15% earnings growth guidance is sufficient to justify a 35x earnings multiple.

Because of this, I would suggest investors avoid Technology One and look elsewhere in the sector at companies such as Altium Limited (ASX: ALU) and Macquarie Telecom Group Ltd (ASX: MAQ).

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Altium. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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