After recently reporting its FY25 result, the TechnologyOne Ltd (ASX: TNE) share price dropped 17% on the day. While it's disappointing to see a decline that large for the ASX share, I'm seeing it as an opportunity to buy more shares at a reduced valuation.
TechnologyOne is one of the world's largest enterprise resource planning (ERP) software businesses with big ambitions, but the market wasn't impressed enough by the numbers as the overall tech sector took a hit that day.
I think the business still has a very promising future and I'm planning to buy more shares soon, assuming it remains as attractively valued as it is now.
Strong revenue growth expected
In FY25, the business delivered 18% revenue growth to $610 million and the annual recurring revenue (ARR) increased 18% to $554.6 million.
TechnologyOne continues to win new deals including the London boroughs of Islington London Borough Council and the Council of the Royal Borough of Greenwich. That helped UKK ARR rise 49% and bodes well for future growth in the country.
The ASX share also hit its target net revenue retention (NRR) rate of 15%, which is how much revenue growth it achieved from existing customers from last year. Revenue doubles in five years if it grows by an average of 15% per year.
The business is aiming to hit $1 billion of ARR by FY30, underpinned by 'SaaS+' (software as a service), its new AI transaction-driven ARR strategy, its significant investments in R&D, developing expanded products and modules, as well as a number of new products. UK growth is an important part of its growth targets.
Rising profit margins
While the business is delivering strong top-line growth, the bottom line is also growing at a very pleasing rate.
In FY25, profit before tax (PBT) climbed 19% to $181.5 million, beating guidance of growth of between 137% to 17%. The business reported a profit before tax (PBT) margin of 30%.
The business is expecting to deliver a PBT margin of at least 35% in the coming years, driven by "the significant economies of scale" of its software and the customer response to its SaaS+ offering.
Considering businesses are usually valued based on their profit, this is a promising sign. As a bonus, higher profits can lead to bigger dividend payouts.
The ASX share is better value
According to the forecast on Commsec, the TechnologyOne share price is valued at 46x FY27's estimated earnings, at the time of writing, following the large decline of the valuation this week.
It's not as cheap as it was in April, but I think this is a great time to pounce on a high-quality business which is trading at a much lower valuation.
