Subscription Model And AI Will Strengthen Future Market Position

Key Takeaways

• Transition to a subscription model ensures stable revenue and positive growth, with noteworthy recurring income.
  
• Innovations and geographical expansion, especially in the U.K., broaden market reach and bolster future revenue.
  
• Objective's transition to a subscription model may impact revenue growth, with contract delays and regulatory dependence posing risks to revenue predictability and stability.

Catalysts

Supplies information technology software and services in Australia and internationally.

• The strong shift to a subscription model, with 100% subscription revenue and 81% recurring revenue, suggests a stable and predictable revenue stream in the future, impacting overall revenue growth positively.
  
• Ongoing investment in R&D, with significant achievements in AI and other innovations, indicates potential for increased product offerings and services, likely to enhance revenue and earnings.
  
• Entry into new geographical markets, especially with the win of the first U.K. customer for Objective RegWorks, is set to expand the addressable market and drive revenue growth in these regions.
  
• Strategic focus on customer value and efficiency, especially in reducing costs associated with service delivery, aims to maintain high net margins while enabling faster customer onboarding.
  
• Regulatory changes driving demand for Objective’s solutions in planning, building, and regulatory environments provide long-term growth prospects and could positively impact revenue and overall profitability.

Objective Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Objective's revenue will grow by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.7% today to 27.0% in 3 years time.
• Analysts expect earnings to reach A$42.0 million (and earnings per share of A$0.44) by about February 2028, up from A$31.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$51.0 million in earnings, and the most bearish expecting A$22.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 39.7x on those 2028 earnings, down from 47.6x today. This future PE is lower than the current PE for the AU Software industry at 70.6x.
• Analysts expect the number of shares outstanding to decline by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.4%, as per the Simply Wall St company report.

Objective Future Earnings Per Share Growth

Risks

• Objective's shift to a subscription model, while complete, involved a long transition that naturally compressed their services revenue, potentially impacting overall revenue growth despite recurring revenue increases.
  
• There were notable contract delays in their Regulatory Solutions segment due to personnel changes and authority absence, risking future revenue predictability and leading to missed targets.
  
• Although commitment is strong toward maintaining high R&D investment, such substantial reinvestment can pressure net margins if revenue doesn’t scale as anticipated.
  
• The focus on profitable growth over revenue growth could limit market expansion and top-line revenue increases in competitive sectors prioritizing rapid scale.
  
• The company's dependence on regulatory changes as demand drivers may expose it to risk tied to shifting political and social climates, impacting both revenue and earnings stability.

Valuation

• The analysts have a consensus price target of A$14.156 for Objective based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$17.8, and the most bearish reporting a price target of just A$5.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$155.5 million, earnings will come to A$42.0 million, and it would be trading on a PE ratio of 39.7x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of A$15.62, the analyst price target of A$14.16 is 10.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.