There are some quality software as a service (SaaS) ASX shares available for Aussie investors to look at.
SaaS businesses have the potential to generate high levels recurring revenue and recurring profit because of their business models. Software businesses can also be very profitable thanks to the nature of software and its limited distribution cost, leading to high gross profit margins.
These are two businesses that could be worth looking at:
Class Ltd (ASX: CL1)
Class is a cloud accounting software provider, predominately for the self-managed superannuation fund (SMSF) industry. It works with thousands of clients that are spread across its different software suites including Class, NowInfinity, Smartcorp and Reckon Docs. The last three names are recent acquisitions made over the last couple of years.
Broker Ord Minnett rates Class as a buy and has a share price target of $2.40 for the company.
The SaaS ASX share said that it will continue to make acquisitions to drive both further scale and improved capability. It’s focused on building business relationships with its new and existing customer base through various methods including customer engagement, marketing and customer needs. With its new, larger customer base, Class will look to increase its revenue per customer with its growing product suite.
In terms of the SaaS financial numbers, Class recently reported that its ARR jumped by 24.6% year on year to $48.6 million. It’s expecting to generate $54 million of revenue in FY21, which would be 22% higher than FY20. It’s also expecting the earnings before interest, tax, depreciation and amortisation (EBITDA) margin will be 40% for the full year.
Class reported that its Class accounts increased by another 2% to 187,624, which also partly helped the business grow its EBITDA by 29% to $10.4 million.
The SaaS ASX share is now looking to new products to drive growth further, such as Class Trust where it now has 175 customers, like accountants, using it with 2,700 trusts operating on the software.
Ord Minnett reckons the Class share price is trading at around 26x FY21’s estimated earnings.
Xero Limited (ASX: XRO)
Xero is another SaaS ASX share in the cloud accounting space, except the main client base is small and medium businesses.
The company has built a large global subscriber base of clients around the world. At the last count in the FY21 half-year result, it had 2.45 million subscribers, with more than half of those based in Australia (1 million) and New Zealand (414,000).
Other regions also have large numbers of subscribers, with those numbers rising quickly. The UK had 638,000 subscribers (up 19%), North America had 251,000 subscribers (up 17%) and the rest of the world had 136,000 subscribers (up 36%) – this includes places like South Africa and Singapore.
One of the key metrics that the SaaS ASX share likes to share with investors is its annualised monthly recurring revenue (AMRR), which grew by 15% to NZ$877.6 million.
The actual revenue that Xero reported in the HY21 result was a 21% increase to NZ$410 million whilst it generated NZ$120.7 million of EBITDA and NZ$54.3 million of free cash flow. Xero’s gross profit margin improved from 85.2% to 85.7%.
At the time of the HY21 report, Xero CEO Steve Vamos said:
This result demonstrates the value our customers attribute to their Xero subscription and the underlying strength of Xero’s business model. We continue to prioritise investment in customer growth and product development in line with the long term opportunity we see.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Class Limited and Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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