TNE: Smashing goals

In August last year I wrote an article about TechnologyOne (ASX:TNE) titled “Doubling in size every five years”. It concluded with the following observation and question. “Whilst revenue might double in 5 years to circa $800 million, can the market capitalization hit $10 billion in the same period. Ultimately it is the answer to the second question that will determine the return on investment for shareholders.”

16 months later the revenue target is well on track having surpassed $500 million in the financial year ended 30 September 2024. As for the question about market capitalization, mission accomplished. The market cap is now $10.17 billion and anyone who invested at that time and held, would have doubled their money.

The prior article also noted “They are aiming for annual recurring revenue (ARR) of $500 million by FY26.” As it turned out, that was too modest a goal as noted in the slide below from their FY24 results presentation. ARR has already reached $470 million rising 20% in FY24 and they have brought forward the $500m target to the first half of FY25.

ARR Target

Source: TNE, Full Year Results, 19/11/24

They have also set a new long term goal of $1 billion ARR by FY30 which is consistent with their objective to double in size every five years.

The FY24 results which were released on 19 November, were very strong and the share price jumped 10% on the day and has continued to rise. Revenue rose 17% driven by SaaS and recurring revenue. EPS rose 14% and dividends increased 15%. The push into the UK is gaining momentum with ARR up 31%.

When I wrote the article last year, TNE qualified for the Quality Compounder screen as presented by Stockopedia contributor Roland Head in his article Building a screen to find Compounding Quality stocks. It still does. The table below compares the position then and now. Most measures have shown small improvements.

Return on equity has been gradually declining, but at 34% is still very high. Operating margins improved slightly to 29%.

For technology companies to stay ahead they need to constantly invest in research and development. TechnologyOne takes this seriously, pouring 25% of revenue back into R&D which last year amounted to $128m. They are able to fund this entirely from their strong cash generation. Even after this investment, they generate high free cash flow which enables them to pay increasing dividends and also build up their cash balance. They now have cash and financial assets of $280 million.

This large cash balance gives them a considerable war chest for considering growth through acquisitions. Recently they acquired CourseLoop for $60 million, a leading firm in curriculum management software for educational institutions. Incorporating this software into their existing suite gives them a solution that covers the entire student lifecycle and is apparently the first SaaS solution of this kind globally. CourseLoop has $9 million in ARR growing at 25% per annum.

Technology stocks are not traditionally thought of as dividend stocks, but TNE has paid a dividend every year since 1996. Over the last five years the dividends per share have grown at a CAGR of 15%. The dividends were 65% franked in FY24, up from 60% in FY23.

This brings us to the Stockopedia rankings.

It follows the typical pattern of a quality compounder stock. The Quality and Momentum scores are exceptionally high and the Value score is exceptionally low.

We have already discussed many of the attributes leading to the high Quality score. Additional elements include their high net revenue retention of 117% and their low churn rate of 1.8%.

Turning to momentum, their profits have not only grown strongly over recent years, but the growth rate tends to meet or exceed the top of the guidance range as shown in the chart below. This adds to the Momentum score as analysts' expectations rise to meet the strong results. This combined with the fact that the Relative Strength of the share price over 12 months exceeds 70% leads to the Momentum Score of 99.

Profit before tax growth

Source: TNE, Full Year Results, 19/11/24

As for the Value score, this is a growth stock. It is priced on the expectation that it will continue to grow at a very strong rate with a PE ratio of 70 and a Price to Sales ratio of 20. A dogged value investor would struggle to justify investing at these levels. Of course the same would have been said 16 months ago and look what happened. A salient reminder that you need to be comfortable with the strategy that you employ and accept that you are not going to catch every opportunity.

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