The Australian technology sector has been dominated by WAAAX shares in 2019. Investors have been drawn to the tech sector favourites, comparing them to the United States’ FAANG stocks. But there are a wealth of tech stocks worthy of investment outside of the big five.
WiseTech Global Ltd (ASX: WTC), Appen Ltd (ASX: APX), Altium Limited (ASX: ALU), Afterpay Touch Group Ltd (ASX: APT) and Xero Limited (ASX: XRO) have seen their share prices rise to dizzying heights before undergoing abrupt corrections. Despite the recent pullback in WAAAX prices, the S&P/ASX 200 Information Technology Index (ASX: XIJ) is up 15.78% over the past year.
Investors overawed by the relentless focus on WAAAX stocks may be forgiven for overlooking tech shares outside the much-hyped quintet. Doing so, however, risks missing out on fruitful opportunities in the Australian technology sector.
The key is to identify players with good products, strong management, and robust revenue streams. Here we examine 3 ASX technology stocks that may have been forgotten in the WAAAX hype.
Technology One Limited (ASX: TNE)
Technology One Limited is an enterprise software-as-a-service (SaaS) provider that has been continuously profitable since 1992. The Technology One share price has risen 23% over the course of 2019 to reach $7.52. The price-to-earnings (P/E) ratio was ~46 at the time of writing and the dividend yield 1.24%.
Technology One shares dipped sharply in May when forecasted FY19 results came in below consensus estimates. Shares dropped nearly 23% from a high of $9.30 to $7.17 a week later.
Technology One reported revenue of $129.3 million for 1H19, up 5% from 1H18. Importantly, SaaS revenues were up 42% to $37.5 million for the half. Profit before tax increased 130% to $24.5 million from $10.6 million in 1H18. Earnings per share were up 100% to 5.65 cents and a half year dividend of 3.15 cents was paid, 75% franked.
Technology One is financially robust, with a debt-to-equity ratio of 0.01% and interest cover of 167x. Net cash was 32.9 cents per share at the half year, up from 29.6 cents per share in the prior corresponding period. Net assets were up $2.7m to $75.8 million for the half year
Technology One has been implementing its transition to a SaaS company for several years now, and boasted a 39% increase in enterprise SaaS customers in 1H19 over 1H18. The company aims to have 1,000 SaaS customers by 2022, and estimates 50% of revenue will come from SaaS by next year.
More than 75% on Technology One revenues are now recurring, with annual recurring revenues expected to triple to >$500 million by FY24. Significant growth opportunities exist in the Asia Pacific region where market penetration does not exceed 18%.
Technology One estimates profit margins will improve to 25% over the next few years and then continue to 30%. The company predicts it will continue to double in size every five years.
Whispir Limited (ASX: WSP)
Whispir Limited listed earlier this year and provides an SaaS communications workflow platform to enterprise customers. Shares in the technology company reached a high of $1.99 in October, up 24% from the IPO price of $1.60, but have since fallen back to levels of around $1.59.
The Whispir platform is used by more than 500 organisations globally to automate interactions between businesses and people. Telstra uses the platform to communicate rapidly with customers and staff, Qantas to manage critical incidents, and New Zealand police to engage with the hearing-impaired community. Key markets are Australia, New Zealand, Asia, and the United States.
Whispir exceeded the financial targets set out in its prospectus for FY19, with the board confident of meeting prospectus forecasts for FY20. Revenues increased 12% to $31.1 million in FY19, driven primarily by strong growth in Australia, New Zealand, and the United States. Average customer annual recurring revenue increased 10% to $63,000, 5% ahead of prospectus forecast. Recurring revenues represent 94% of total revenues.
The technology company is not yet profitable, however is performing ahead of prospectus forecasts. Earnings before interest, tax, depreciation, and amortisation (EBITDA) were negative $11 million in FY19, beating the prospectus forecast by $900,000. The net profit after tax (NPAT) loss was $23.3 million, $800,000 ahead of the prospectus forecast.
At the end of FY19 Whispir reported a balance of $26.8 million in cash and no debt, leaving it well positioned to execute its growth strategy. Whisper’s growth strategy revolves around winning new high-value customers and driving increased revenue from existing customers. Market expansion in Asia and North America is targeted.
Nearmap Ltd (ASX: NEA)
Nearmap Ltd provides high resolution aerial imagery and uses artificial intelligence to provide data about the content of its images. The global aerial imagery market serviced by Nearmap is expected to grow to US$10.1 billion in 2020.
Shares in Nearmap are down more than 40% from highs of $4.23 in June this year to $2.47 currently. The former market darling was punished by investors in August when FY19 results failed to meet consensus estimates, with shares falling nearly 10% in a day.
Nearmap reported a 45% increase in statutory revenue to $77.6 million underpinned by expansion in annualised contract value, which was up 36% to $90.2 million. Operating expenses however increased by 29% to $66.6 million while the cost of revenue was up 113% to $22.2 million.
Nearmap is focused on growing its North American presence, targeting sales and marketing initiatives in the region. In FY19, Nearmap launched its second North American sales office and completed its first Canadian capture program, covering 64% of the population.
North America now contributes more than 30% of annualised contract value, amounting to $30.2 million in FY19 from $25 million in FY18. Average revenue per subscription increased to $22.7 million in North America from $21.2 million the previous year. By comparison average revenue per subscription was $6.9 million in FY19 for Australia and New Zealand.
Worldwide expansion is on the cards for Nearmap, which intends to be the dominant global player in its sector within 5 to 7 years. As Chief Executive Rob Newman told the Australian Financial Review, “we’ll be the no. 1 in this industry globally, so that means we’ll also be expanding into Europe and Asia.”
The ASX technology sector provides a wealth of investment opportunities that extend well beyond WAAAX. By expanding horizons beyond the most popular stocks investors may uncover underrated shares overlooked by others.
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Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO. The Motley Fool Australia owns shares of and has recommended Nearmap Ltd. The Motley Fool Australia owns shares of Altium, Appen Ltd, WiseTech Global, and Xero. The Motley Fool Australia has recommended Whispir Ltd. 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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