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Why these 3 ASX tech shares should be on your 2020 watchlist

The ASX technology sector is becoming increasingly crowded. This is good news for tech investors who no longer have to look offshore for a variety of technology companies to invest in.

We take a look at 3 ASX tech shares that should be on your watch list in 2020.

Audinate Group Ltd (ASX: AD8)

Audinate’s Dante platform distributes digital audio and video signals over computer networks rather than via analog cables. The technology has been used by Sydney Trains, the Super Bowl, and Wembley Stadium. Audinate listed on the ASX in July 2017 at $1.22 and now trades at $8.24.

Dante

Dante allows transmission of high quality media via standard IT networks. Networked digital connectivity is replacing traditional point to point cabling in the audio visual (AV) industry. Software-based AV systems are replacing hardware AV systems, transforming the industry. Dante is an ‘AV Application Stack’, which comprises system software, hardware, and products such as microphones, speakers and cameras.

Dante products

More than 2100 Dante-enabled products are now available in the market, manufactured by names such as Bose, Bosch, Sony, and Yamaha. This is more than 6 times greater than Dante’s nearest competitor. The number of Dante-enabled products is a measure of the size of the Dante ecosystem – the larger this ecosystem becomes, the stronger the economic network effect.

Results

In FY19, Audinate reported earnings before interest tax depreciation and amortisation (EBITDA) of $2.8 million, up from $0.6 million the previous year. Revenue grew 44% to $28.3 million, while operating cash flow increased to $3.6 million from $1.0 million. There was a 29% increase in Dante units shipped annually and a 22% increase in OEMs shipping Dante product.

Expansion

Audinate expanded into Germany, China, and Japan in FY19. in FY20 the company will continue to focus on delivering Dante in different languages to help further penetrate non-English speaking markets. Dante applications for PC, Mac, and Linus OS were launched in June 2019 with revenue expected in 2HFY20. Perhaps most importantly, Audinate made its first steps into the video market with the launch of Dante AV products during 2019. This more than doubles the total addressable market of the existing audio networking business.

Rhipe Ltd (ASX: RHP)

Rhipe wholesales cloud software offerings such as Microsoft365 to resellers, earning recurring revenue from licensing fees and value add services. Rhipe came to the ASX via a backdoor listing in April 2014 and is currently trading at $2.03.

Rhipe provides a platform for recurring subscription management used by IT resellers to buy, provision, and bill end user clients for monthly cloud software subscriptions. The company provides value added services for resellers including marketing, consulting, and 24/7 support as a service.

Results

In FY19 Rhipe reported EBITDA of $10 million, up 56% from $6.4 million the previous year. Profit after tax increased 103% to $6.2 million from $3.1 million in FY18. Earnings per share increased 100% to 4.53 cents and dividends of 3 cents per share were paid, a 100% increase over the previous year.

Joint venture

Rhipe’s growth strategy encompasses geographic expansion, continuing to expand its value added services, and riding the cloud momentum. In 2019 Rhipe entered a joint venture with Japan Business Systems Inc (JBS) to establish Rhipe Japan. Rhipe holds 80% of the share capital in the joint venture and JBS the remaining 20%. Japan is one of Microsoft’s largest markets with the cloud segment estimated to grow at a compound annual growth rate of 25% per annum over 3 years.

Acquisition

In August 2019, Rhipe acquired Network2Share Pty Limited, an Australian security software company that has developed a user-friendly encryption product that Rhipe plans to bundle with other software licenses. This provides Rhipe with new and differentiated intellectual property exclusively available via the Rhipe platform.

Guidance

Rhipe has provided operating profit guidance of $16 million for FY20. Group sales were $73.1 million in 1QFY20, 33% above the prior corresponding period. Group revenue was up 25% to $12.8 million. Operating expenses also increased by 29% to $9 million. Operating profit for 1QFY20 was $2.9 million, an increase of 6% on the prior corresponding period.

Technology One Limited (ASX: TNE)

Technology One Limited is an enterprise software-as-a-service (SaaS) provider that has been continuously profitable since 1992. In FY19, Technology One marked its 1oth consecutive year of record profit with net profit before tax of $76.4 million.

Technology One provides products to customers in the government, education, health and community services, asset and project, and finance and corporate industries. Technology One manages the business in 3 operating segments. The Software segment covers sales, R&D, SaaS platform and support. The Consulting segment is responsible for the implementation of Technology One software. The Corporate segment covers the corporate functions. Software profits were up 38% to $51.2 million in FY19, Consulting profits were up 64% to $9.9 million, and Corporate profits were up 102% to $15.3 million.

Transition to SaaS

The business is in the process of transitioning into a SaaS company. SaaS annual recurring revenue increased 44% to $102 million in the year to 30 September. Total annual recurring revenues are predicted to grow to $500 million in FY24 from $202 million in FY19. Total annual recurring revenue is estimated to account for 93% of revenues by FY25.

Results

Net profit after tax increased by 15% to $58.5 million in FY19. A full year dividend of 11.93 cents per share was paid (in an increase of 8%). The dividend payout ratio was 65%. At 30 September, Technology One reported net cash of 33.2 cents per share, with cash and cash equivalents of $105 million, up $700,000. The company had no debt.

UK

Technology One has expanded into the UK, where a loss of $1.9 million was recorded in FY19, an improvement on the $5.2 million loss the previous year. The company advises it sees significant upside in coming years. New sales management is in place to drive the next stage of growth and the FY20 pipeline is strong. The company believes it is approaching critical mass in the UK, where the market for their enterprise system is 3 times the size of the Australian market.

Forecast

Technology One has reported that its key markets remain strong. Market penetration in APAC is estimated to be less than 20%, leaving significant room to grow. Continued strong growth in SaaS annual recurring revenue and profits is expected, with SaaS annual recurring revenue currently growing at 44% per annum. Based on current rates of profit growth, Technology One estimates it can continue to double in size every 4 or 5 years.

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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 AUDINATEGL FPO. The Motley Fool Australia has recommended AUDINATEGL 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.