Software as a service (SaaS) ASX shares could be compelling businesses to consider for a portfolio.
These companies are in the software space and these businesses can often display attractive features including regular revenue from loyal customers.
Just because a business is a SaaS company, doesn’t mean it’s automatically worth owning. But these two SaaS ASX shares could be good long-term ideas:
TechnologyOne Ltd (ASX: TNE)
TechnologyOne is a software business that says it has spent hundreds of millions of dollars building the world’s most trusted SaaS enterprise resource planning (ERP) software.
The company is currently rated as a buy by the broker Morgans with a price target of around $10.
A key benefit of its software for customers is that the entire suite of enterprise software can be accessed from any device to utilise their mission critical systems. The company said that this was very helpful for the shift from the office to remote working.
It offers software for different sectors including education, local government, government, health and community services, asset management and project delivery, corporate and financial services.
A few months ago, TechnologyOne reported its full year result for the period ending 30 September 2020.
The SaaS ASX share said that in the FY21 result, total revenue grew 4%, whilst expenses rose 3%. Underlying profit before tax grew 13% to $86.1 million and reported profit before tax grew 8% to $82.5 million.
Revenue from the SaaS and continuing business rose 12% to $269.8 million whilst the SaaS annual recurring revenue (ARR) went up 32% to $134.6 million.
The broker said that the shift to SaaS revenue means that it’s turning into higher quality revenue.
One of the main ways that TechnologyOne ensures it stays ahead of the game is its large investment into research and development. Its R&D spending before capitalisation was up 13% to $68.1 million in the last financial year, which represented 22% of revenue.
This result allowed the board to implement an 8% increase to the full year dividend to 12.88 cents.
On Morgans’ numbers, the TechnologyOne share price is valued at 36x FY21’s estimated earnings.
Altium Limited (ASX: ALU)
Altium counts as a SaaS ASX share with a growing division called Altium 365 which is the company’s cloud offering.
The business says that Altium 365 is the electronics product design platform that unites PCB design, MCAD, data management, and teamwork. It allows software engineers to collaborate on projects wherever they need to. This is a particularly useful tool in a world affected by the COVID-19 pandemic.
Altium has a very high quality client list including Tesla X, Space X, NASA, John Deere, Toyota, Cochlear Limited (ASX: COH), ResMed Inc (ASX: RMD), CSIRO, Honeywell, Qualcomm, Broadcom, Texas Instruments, Siemens, Boeing, Lockheed Martin, Amazon, Google, Disney, Apple and Microsoft.
The electronic PCB software business says that it’s confident of achieving its updated flight path to the 2025 target of US$500 million revenue and 100,000 subscribers for dominance (excluding TASKING, with 10% to 20% of revenue to come from future acquisitions). That’s despite the impacts of COVID-19.
A key part of the allure of Altium 365 is the potential for direct monetisation. It could generate transaction fees on manufacturing, such as the Airbnb model and also through premium services, such as the Amazon Prime model.
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Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. The Motley Fool Australia has recommended Cochlear Ltd. and ResMed Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.