I think ASX tech shares can be very exciting investments because of their ability to expand quickly and generate strong margins.
The nature of software usually means it's very cheap and very quick to sign up a new client or subscriber – the company doesn't need to wait for more cars or tables to be manufactured.
Being able to replicate new software for a very low cost is exciting because additional revenue can come with a high gross profit margin and add a lot to the company's cash flow and earnings before interest, tax, depreciation and amortisation (EBITDA) profit margins.
With that in mind, there are three ASX tech shares I want to talk about.
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TechnologyOne Ltd (ASX: TNE)
TechnologyOne describes itself as Australia's largest enterprise software company, with locations globally. It provides global software as a service (SaaS) enterprise resource planning (ERP) solution which is available on any device, anywhere, any time and is "incredibly easy to use).
It has more than 1,200 corporations, government agencies, local councils and universities using its software. The business continues to win new clients, boosting its scale.
One of the most pleasing elements of the business is that existing clients continue to pay more for the software as the company invests more in the software offering.
In FY23 the business grew its profit before tax by 15%, cash flow generation rose 36% to $104.6 million and the board increased the dividend per share by 15%.
It's making strong progress in the UK, which is a bigger market than Australia. UK annual recurring revenue (ARR) increased by 52% to $26.5 million, which is a very strong increase.
The company is expecting to double in size in five years, which is an impressive compounding rate.
Airtasker Ltd (ASX: ART)
Airtasker offers a platform that enables people who need work to connect with people and businesses willing to do that work. Examples of tasks include removalists, furniture assembly, photography, food delivery and many other categories.
The company has a gross profit margin of more than 90%, so the more volume it can generate the better its operating profit margins will be.
The ASX tech share has made great progress in its profitability. In the recent FY24 first-half result, it reported positive free cash flow of $0.1 million, an improvement of $4.7 million. The company also achieved positive EBITDA of $2 million, which represented growth of $7.1 million.
Reaching breakeven, and positive profitability, can be an important milestone for ASX tech shares because profit can jump higher in subsequent years if revenue keeps growing.
Despite the challenging economic conditions amid inflation and high interest rates, the company reported that Airtasker marketplaces revenue increased 10.3% to $18.9 million
It has a small presence in the UK and an even smaller position in the US. While the international segment of the business is currently small, it's growing quickly – in HY24 international revenue jumped 35.3% to $0.6 million.
If Airtasker can keep growing its revenue and the number of tasks posted over the long term then I think it has a very promising future.
Siteminder Ltd (ASX: SDR)
Siteminder provides software that can help hotels unlock their full revenue potential. It also has Little Hotelier, an all-in-one hotel management software offering for small accommodation providers. It generates more than 115 million reservations worth over $70 billion in revenue for hotel customers.
The ASX tech share is benefiting from the ongoing digitalisation of transactions, how people book accommodation and a growing market share. In the HY24 result, Siteminder saw total revenue growth of 27.9% to $91.7 million, with subscription revenue rising 18.5% and transaction revenue growing 30.5%.
Siteminder saw its cash flow, underlying EBITDA and statutory net loss all make strong progress towards breakeven, with margins significantly improving. I think it has a promising future if revenue keeps climbing at a double-digit pace.
