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This ASX 200 tech share is sinking 5% lower after its half year update

red arrow pointing down, falling share price
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The TechnologyOne Ltd (ASX: TNE) share price has come under pressure today following the release of its half year update.

At the time of writing the enterprise software company’s shares are down 5% to $9.34.

This compares to a strong 2% gain by the S&P/ASX 200 Index (ASX: XJO) this morning.

How did TechnologyOne perform in the first half?

For the six months ended March 31, TechnologyOne reported a 6% increase in revenue to $138.4 million and a 6% lift in profit after tax to $19.1 million. This result was underpinned by continuing strong demand for its SaaS ERP Solution.

Speaking of which. At the end of March the company’s SaaS Annual Recurring Revenue (ARR) stood at $110.2 million, up 33% on the prior corresponding period.

This ARR growth was driven largely by an increase in the number of large-scale enterprise SaaS customers. They have increased 22% over the last 12 months to 475. Pleasingly, management advised that the SaaS business continues to grow during the current pandemic.

Growing at an even quicker rate was its cash flow generation. TechnologyOne more than doubled its cash flow to $9.9 million during the half. This led to its cash and cash equivalents lifting 23% to $84 million.

In light of this and its confidence in its near term outlook, the company’s board has declared an interim dividend of 3.47 cents per share. This represents a 10% increase on last year’s interim dividend.

Outlook.

Unlike countless other companies, TechnologyOne has been able to provide guidance for the full year.

TechnologyOne’s CEO, Edward Chung, revealed that it has a strong pipeline and a high proportion of locked in recurring revenues. As a result, he is confident the company is well positioned to deliver continuing strong growth over the full year.

He commented: “TechnologyOne is well positioned, as the markets we serve are generally resilient. Our global SaaS ERP solution is mission critical to the markets we serve, and also enables any device, any time access from anywhere around the world.”

In light of this, the chief executive expects the company’s FY 2020 net profit before tax to increase 8% to 12% year on year.

Foolish Takeaway.

While growth in the current environment is clearly a big positive, I suspect the market was looking for stronger guidance given the premium its shares trade at. Based on its last close price, its shares were trading at 52x trailing earnings this morning.

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Returns as of 6th October 2020

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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