Technology One Limited (Technology One, the Group, ASX: TNE) is Australia’s largest enterprise software business and an ASX 100 company. The business was established in 1987 and listed on the ASX in 1999. Today Technology One’s specialty product focus areas are the Tertiary Education and Local Government sectors. The Group provides 1,300 government agencies, universities, and local council customers in Australia and the UK with enterprise software solutions that enable them to focus on their business and not technology.
Set to double in size every five years
Technology One management have recently reiterated their long-term growth target to achieve $1 billion of Annual Recurring Revenue (ARR) by FY2030. This target represents a doubling in ARR from the current $470 million recorded in FY24. The target requires an annual compound growth rate of about 15 percent, compared to the 20 percent ARR growth rate in FY24.
A key strategic initiative that is driving this ambitious ARR target is Technology One’s globally unique ability to provide its large-scale enterprise software solution and implementation to major customers on one single fee. This removes the need for traditional, complex, long, risky and expensive consulting implementations to provide faster go-lives, which has the benefit of providing value for customers more quickly. New software implementation time frames undertaken by third-party consulting firms typically require thousands of days of complex and risky consulting implementations. Technology One’s solution takes 160 days on average to implement.
The Group’s ambitious ARR growth target is underpinned by its $128 million in R & D in FY24. This was up 14 percent on Technology One’s R & D expenditure in the previous financial year and is equivalent to 27 percent of annual revenue. The Group’s R & D program is focused on extending the functionality and capabilities of its platforms that embrace new technologies, new concepts, and new paradigms.
Significantly, 90 percent of Technology One’s total revenue comprises ARR, which means that most of the Group’s revenue is locked in from the commencement of the financial year.
Fifteen consecutive years of record profit and revenue growth
Technology One achieved a record full year profit and revenue outcome in the September 2024 financial year, supported the Group’s resilient Local Government and Higher Education markets in Australia and the UK. The profit result was 18 percent higher than the previous financial year and about 20 percent ahead of earnings guidance.
Net revenue retention, which measures the percentage of revenue retained from existing customers from year-to-year and includes software upgrades and new product sales was an impressive 117 percent in FY24. Cashflow conversion, as measured by FY24 free cash flow of $119 million from net profit after tax of $118 million, was 101 percent. At 30 September 2024, Technology One had $278 million in cash with zero debt, These financial metrics provide investor confidence that the $1 billion ARR target by FY30 is demonstrably achievable.
The Group’s conservative balance sheet provides flexibility to execute strategic bolt-on acquisitions without the need to raise shareholder dilutive equity. A perfect example of this flexibility is the recent acquisition of 100 percent of CourseLoop Pty Ltd for $60 million in cash and options. The purchase forms part of the Group’s strategy to build its presence in the Higher Education sector by encompassing the entire student lifecycle of student management, timetabling and scheduling, human resource and payroll, enterprise asset management, and financials into a single unified enterprise-wide software solution. The acquisition makes Technology One’s Higher Education offering deeper and more unique than any other education software provider in the world. The acquisition is expected to be earnings per share accretive from FY26.
The future
The key to Technology One’s earnings growth is its shift from one-off traditional project consulting revenue and legacy license fees to high-quality, recurring revenue at a targeted 115 percent revenue recognition ratio. This strategic shift is delivering higher pre-tax margins that were 30 percent in FY24, compared to 29 percent in FY23. This higher margin includes the $3 million negative impact of transitioning to the recurring revenue model from one-off licence and consulting fees. Management have recently stated that increasing economies of scale over coming years are expected to further improve Group margins to 35 percent.
The Group’s dividend policy seeks to grow shareholder dividends by between 8 and 10 percent per annum based on a pay-out ratio of 55 to 65 percent.
This strong shareholder return bias combined with a targeted 15 to 20 percent revenue growth and a low customer churn rate of 1.3 percent, backed by increasing product depth and market share in Australia and the UK, means that Technology One is well placed to deliver ongoing shareholder upside in the decade ahead.
