Being able to lock in recurring revenues can take a lot of the risk out of managing a company. Reliable income streams make budgeting and forecasting far easier, as management can predict with greater accuracy the amount of free cash they will have available to allocate to various expenses as well as to invest in new growth opportunities.
This is particularly true for young companies. If they can lock in future cash flows earlier in their life it means that they have a solid cash base from which to grow their business. And reduced volatility in revenues is also great for investors during reporting season, as there is less of a chance that negative earnings surprises will weigh down their portfolios.
With this in mind, I’ve trawled through the ASX and come up with a list of what I think are 5 of the best tech companies for recurring revenues. Remember, recurring revenues is just one metric upon which to base an investment and there are plenty of other things to consider before purchasing shares in a new company. However, this is still a great place to start your research.
WiseTech Global Limited (ASX: WTC)
Logistics software developer WiseTech Global has been a bit of a market darling for a while now, although volatility on the local exchange has hurt its share price over the last few months. At the time of writing, it is trading at $15.65, which is well short of the 52-week high of $25 it reached back in August. Which means now might be the perfect time to snap it up on the cheap.
Almost 90% of the $222 million in revenues WiseTech generated in FY18 were recurring, mostly driven by licenses for its flagship CargoWise One product. Customer attrition was also incredibly low at less than 1%, giving management and shareholders increased faith in the quality and reliability of the company’s earnings.
ELMO Software Ltd (ASX: ELO)
ELMO produces a suite of cloud-based software delivering people management and payroll solutions. Recurring revenues for the last 3 years have been holding firm at 93% of total revenues, and the FY18 customer retention rate was 92%.
Plans to ramp up spending on marketing and R&D in FY19 havn’t proved popular with investors and pulled down ELMO’s share price. However, I think the company is building a solid platform to deliver superior returns in the future.
Altium Limited (ASX: ALU)
Altium specialises in the development of software for the design of printed circuit boards (PCBs), which are an integral component to just about every electronic device. Altium has put over 30 years’ worth of R&D into its PCB software and hardware, and is fast becoming a market leader. Plus it has no debt on its balance sheet and it relies on a subscription-based revenue model – over half of the $140 million worth of revenues it brought in in FY18 were from recurring sources.
IRESS Limited (ASX: IRE)
IRESS develops innovative software solutions for clients in the financial markets, wealth management and mortgage sectors. Founded in Australia in 1993, the company has expanded internationally, and now has offices in Canada, the UK, Hong Kong, South Africa, Singapore and New Zealand.
For the six months ended 30 June 2018 IRESS brought in almost $230 million worth of revenues, an increase of 5% over the same period in the prior year – and over 90% of these revenues were recurring.
Livetiles Ltd (ASX: LVT)
Livetiles is an Australian IT company that develops software to help businesses create their own internal dashboards, intranet portals and online working environments. The company’s innovative use of AI and machine-learning technology has caught the attention of some big names internationally – it is now collaborating with tech giant Microsoft in the US.
On an annualised basis, recurring revenues for the quarter ended 30 September 2018 were up 272% year-on-year to $18.6 million. Livetiles is a young company with a market capitalisation of a little over $150 million, which makes it a riskier investment than the other tech stocks on this list which all have a longer track record of consistent earnings. However, it is setting itself up for solid long-term growth by locking in recurring revenues so early in its life.
Motley Fool contributor Rhys Brock owns shares in WiseTech Global Limited (ASX:WTC), ELMO Software Ltd (ASX:ELO) and Altium Limited (ASX:ALU)The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ELMOSFTWRE FPO. The Motley Fool Australia owns shares of Altium and WiseTech Global. The Motley Fool Australia has recommended ELMOSFTWRE FPO and IRESS Limited. 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.