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How Technology One Limited just reported another strong year of SaaS revenue growth

This morning software and IT services business Technology One Limited (ASX: TNE) reported its financial results for the full year ending September 30, 2018. Here is a summary of the results with comparisons to prior corresponding periods.

  • Net profit before tax of $66.5 million, up 15%
  • Revenue of $299 million, up 9%
  • Expenses of $282 million, up 8%
  • Total annual recurring revenue of $169 million, up 22%
  • Operating cash flow of $49 million, up 5%
  • Cash and cash equivalents of $104m, up 12%
  • Earnings per share up 14% to 16.1 cents
  • Final dividend of 6.16 cents per share
  • Total annual dividends of 11.02 cents per share, including a 2 cents per share special dividend
  • Expects Software-as-a-Service (SaaS) (recurring revenue) business to continue to grow strongly in FY 2019

This is another impressive result from what claims to be Australia’s largest enterprise Software-as-a-Service business, with all of the key financial metrics tracking in the right direction and the group’s SaaS business growing by 22%.

This is important because it seems Technology One’s management is keen to emphasise its transition from a plain software provider to a SaaS (recurring revenue) business as this could lead to a re-rating in its valuation or share price if investors agree.

Technology-based SaaS businesses commonly trade on multiples anywhere between 5-15x sales and sky-high multiples of profits. Overall though, Technology One today trades for 35x trailing earnings per share of 16.1 cents, which suggests the market is already factoring in its rise as a SaaS-style business.

For investors it’s also important to note that Technology One only pays a moderate proportion of its profits out in dividends and invested $54 million last year in research and development of new products or technologies that could support new growth products or services.

All of the $54 million investment was expensed as well, which is notable as it means it comes straight out of the bottom line, whereas some technology companies capitalise R&D costs in a move that can artificially inflate accounting profits.

Technology One is forecasting “strong profit growth” in FY 2019 and looks one of the strongest technology businesses on the local market.

However, investors should remember a lot of strong growth is already priced into its valuation as with other tech share like Appen Ltd (ASX: APX) or Xero Limited (ASX: XRO). Therefore if the business has a hiccup the share price could fall sharply.

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Motley Fool contributor Yulia Mosaleva owns shares of Xero. The Motley Fool Australia owns shares of Appen Ltd and Xero. 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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