The Motley Fool

Why these 2 top ASX tech shares need to be on your watchlist for 2020

The demand for information technology products and services has exploded over the past decade or so. In Australia, tech shares have been a little slower to take off. Now that the ASX is set to create its own mini NASDAQ, we take a look at 2 ASX tech shares to watch in 2020.

A closer look at the ASX tech landscape

Australian retail investors have traditionally lagged behind growing consumer demand in the tech sector, with the ASX weighted towards banks and resources. Part of this is due to lack of investment opportunity – in the past, the ASX has lacked a diversity of listed technology companies. Now, an increasing number of technology companies are listing on the ASX.

The other stumbling block is lack of understanding. Tech stocks can be more difficult to assess than more conventional businesses. Information technology and internet-related companies are complicated. They vary from telecommunications and digital devices to social networks and online services. Differing business models and competitive landscapes can be hard to understand and compare.

Fundamentally, the same principles apply to tech stocks as apply in other sectors – companies need good management, a good product, and good revenue streams to succeed.

Here are 2 ASX tech shares that could fit the bill for 2020.

EML Payments Ltd (ASX: EML)

The EML Payments share price has increased nearly 200% to $4.31 this year from $1.44 in January. EML Is a payment solution provider that provides gift card and incentive programs, reloadable value cards, and virtual accounts for business payments.

EML has offices in Australia, North America, the United Kingdom and Europe. Projects EML has delivered include providing gaming payout cards for Sportsbet, salary packaging for Maxxia, and creating single load prepaid cards for the Queensland Government.

In the 5 years to FY19, EML’s earnings before interest tax depreciation and amortisation (EBITDA) grew by 82% on a compound annual basis. EBITDA was $29.1 million in FY19, up from $20.8 million in FY18. Of that, 68% was organic growth and 32% was attributable to an acquisition. Revenue of $97.2 million was earned in FY19, up 37% from the previous year. Approximately 87% of revenue was generated from recurring revenue streams, up 26% on the previous period. Net profit after tax (NPAT) was $8,450,000, up 283% from the previous year.

EML has made 6 acquisitions since 2014, including 2 in 2019. In November, EML agreed to acquire Prepaid Financial Services Ireland Limited (PFS) a provider of white label payments and banking-as-a-service technology. PFS provides payments and digital banking capabilities, e-wallets, and payout/distribution programs. PFS operates in 24 countries and supports 26 currencies.

The upfront enterprise value is $423 million with an earn out component of up to $103 million. The acquisition is being funded via a $67 million placement, a $283 million entitlement offer, a $175 million debt facility ($130 million drawn), and scrip consideration.

EML reported 1QFY20 revenue of $23.2 million up from $17.2 million the prior corresponding period. Gross debts under the company’s incentive programs, cards, and virtual accounts exceeded $3.2 billion, an increase of 74% over 1QFY19. The group expects EBITDA to be in the range of $38.5 million to $42.5 million in FY20 which would represent growth of 28-43% over FY19 (excluding acquisition costs).

LiveTiles Ltd (ASX: LVT)

LiveTiles supplies tools to create dashboards, employee portals, and corporate intranets that can be enhanced by artificial intelligence and analytics. LiveTiles is headquartered in New York with operations across the US, Europe, and Australia. LiveTiles shares started the year at 34 cents and pushed over 59 cents in April and July, but have since dropped back to 26 cents.

As at November, LiveTiles reported $42.9 million in annualised recurring revenue and is targeting $100 million by June 2021. The company estimates its addressable market to be worth $13 billion and consist of some 300,000 customers. LiveTiles landed its first paying customer in February 2015 and now boasts more than 900 customers across every major industry vertical.

Organisations are increasingly moving away from customised coding of intranets due to the long project delivery timeframes involved. LiveTiles solves for this problem by reducing custom coding requirements and allowing for rapid deployment. LiveTiles’ intranet application integrates with 3rd party applications, analytics, AI powered employee profiles and chat bots.

LiveTiles’ annualised recurring revenue has increased 10-fold over the past two years, driven by a higher proportion of new enterprise customers, product cross sell, and increased penetration of existing customers. The number of paying customers increased 71% in FY19 while the number of reseller partners increased 89% to 178. Total revenue in FY19 was $22.5 million, an increase in 249% on the previous year. Excluding non-cash expenses, a loss before tax of $32.2 million was recorded, up from $20.8 million in FY18.

LiveTiles has a strong relationship with Microsoft with the latter accrediting LiveTiles as ‘co-sell’ products. This incentivises Microsoft sales teams to sell LiveTiles solutions. LiveTiles aims to target the approximately 300,000 organisations using Office365 and Sharepoint platforms – to date, LiveTiles estimates this market is only 1% penetrated in terms of intranet software.

In February, LiveTiles completed the acquisition of Wizdom, a Microsoft-aligned workplace software business. Wizdom has a customer base of 243 customers across Europe with annualised recurring revenue of $8 million. At the time, $15 million was raised to fund the acquisition, which will allow LiveTiles to deliver new capabilities in relation to content publishing.

In September, LiveTiles raised $50 million in capital via a share placement to new and existing domestic and international investors. The raising was completed at 35 cents per share and included a $5 million share purchase plan for existing eligible shareholders. Funds raised will be used to support continued customer and revenue growth.

LiveTiles completed the acquisition of CYCL AG in early December. CYCL AG is an intelligent intranet software business operating in Switzerland and Germany. CYCL AG offers a mobile app (a ‘pocket intranet’) aimed at organisations with large frontline workforces. The technology is complementary to LiveTiles’ offering and expands the total addressable market.

The acquisition is profitable and cash flow generative, and creates the opportunity to cross sell LiveTiles technology. Upfront consideration was $6.3 million in cash and $12.6 million in shares with a 2 year earn out worth up to $13.2 million.

Foolish takeaway

These 2 technology companies could see further rapid growth in 2020. Operating in different segments, both have benefited from organic and acquisitive growth in 2019. Will further acquisitions be on the cards in 2020? Time will tell in this corner of the ASX tech sector.

For quality growth shares to add to your 2020 watchlist too, don't miss the report below.

NEW. Five Cheap and Good Stocks to Buy in 2019….

Our Motley Fool experts have just released a brand new FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.8% fully franked yield...

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.

CLICK HERE FOR YOUR FREE REPORT!

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 Emerchants Limited. The Motley Fool Australia has recommended Emerchants Limited and LIVETILES FPO. 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.

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.

CLICK HERE FOR YOUR FREE REPORT!