Following a record tenth consecutive year of growth, the Technology One Limited (ASX: TNE) share price has fallen nearly 24% after trading at an all-time high of $9.40. Despite a slightly weaker outlook, there is great potential for future growth, which could make the share a great long-term buy.
Who is Technology One?
Technology One is an Australian enterprise-software firm servicing defensive sectors such as education and local and federal government. The company’s current flagship product is the ‘Ci’ platform, which is a cloud-based resource planning software accessible over multiple devices.
Initially, Technology One started out by providing on-premises software solutions; however, investment in cloud technology has seen it become Australia’s largest software as a service (SaaS) business. Currently, Technology One operates in six countries, servicing more than 1200 businesses and government departments.
The shift to cloud-based technology has resulted in more consistent, recurring revenue for Technology One over the years, with clients preferring to view software as an operating cost rather than a large, up-front capital expenditure. Technology One has grown to compete with global giants SAP and Oracle Corporation (NYSE: ORCL). With SaaS contributing greatly to its revenue, Technology One has a strong argument to join the likes of WiseTech Global (ASX: WTC), Xero Limited (ASX: XRO) and Appen Ltd (ASX: APX) as part of the hot ‘WAAX’ group.
Ten years of growth
Last week, Technology One reported its tenth consecutive year of growth, with a net profit of $24.5 million, up 130% from the previous year. Revenue for the half year was up 5% to $129.3 million and expenses down 7% to $104.8 million.
SaaS annual contract value (ACV) was up 45% to $85.8 million and recognised SaaS fees also improved 42% to $37.5 million. Operating cashflow also rose, with balance sheet cash improving 19% to $68.2 million. Technology One also announced that it would be increasing its dividend by 10% to 3.15 cents per share.
Why has Technology One’s share price fallen?
Following the release of its half-year results, the Technology One share price plunged nearly 24% last week after trading at an all-time high of $9.40. Despite posting a record tenth consecutive year of growth, investors were spooked into selling by the company’s outlook.
Technology Once provided full-year guidance that net profit before tax would come in between $71.6 million and $76.3 million, in comparison to market consensus of $76.8 million. After a stellar run that has seen the company’s share price surge in 2019, investors were quick to take profit on the slightly lower outlook.
Is it a buy?
Personally, I see the correction in the Technology One share price as a buying opportunity. However, given the analogy of ‘catching a falling knife’ I think it would be wise to wait for the share price to consolidate before buying.
Technology One is on its way to join the likes of Appen and Xero as a SaaS player on the ASX. Despite last week’s fall, the stock is still up more than 17% in 2019, with its price-to-earnings ratio increasing from 29x to about 50x.
The SaaS business is growing rapidly in the Asia-Pacific region and Technology One aims to expand operations further into Britain, where the target market for its services are three times larger. The company continues to invest in research and development, with more than $60 million spent over the full year to develop its digital experience platforms.
I think that the difference in the market’s forecast of full-year profit and the company’s guidance will be trivial in the grand scheme of things. Technology One’s growing SaaS business, expansion into Britain and potential in the US present very exciting future growth prospects.
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Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of WiseTech Global. 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.