Digital Transformation And Cybersecurity Will Drive Explosive SaaS Expansion

Key Takeaways

• Accelerating government SaaS migrations and rapid international expansion position Objective for outsized recurring revenue and substantial long-term margin growth.
  
• Powerful R&D, strength in secure process management, and high-velocity sales drive operating leverage, pricing power, and untapped profitability upside.
  
• Heavy reliance on public sector clients, regulatory pressures, and intensified competition threaten growth, profitability, and the effectiveness of expansion and innovation strategies.

Catalysts

Supplies information technology software and services in Australia and internationally.

• Analyst consensus expects strong SaaS growth from subscription migration, but they may be underestimating the pace and size of revenue uplift as major government clients, including top five customers, accelerate their move to Nexus, with average revenue uplift for conversions tracking at over two times prior contract value, setting the stage for outsized ARR and long-term margin expansion.
  
• Analysts broadly agree on international expansion as a growth driver, but recent early wins like the City of San Diego and rapid ramp-up of U.S. and U.K. go-to-market teams position Objective to unlock far more explosive, sustained ARR growth in these large markets than consensus bakes in, pointing to meaningful step changes in top-line growth.
  
• Surging regulatory complexity and rising cybersecurity scrutiny are intensifying the need for secure process management, supporting Objective's brand as the default trusted provider and granting significant pricing power, which is likely to drive margin expansion and recurring revenue durability far into the future.
  
• Objective's deep, multi-year R&D program-already surpassing $300 million in historic investment and running at record levels-points to the coming launch of AI-infused products for multiple global end-markets, which could unlock new client segments and recurring revenue streams, greatly accelerating both revenue and earnings growth.
  
• A shift in sales mix, with more customer wins occurring through high-velocity, low-touch "Accelerator" implementations and increasing wallet share from cross-solution sales, is driving substantial operating leverage that is not yet fully recognized in profitability forecasts, supporting significant future net margin upside.

Objective Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Objective compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Objective's revenue will grow by 15.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 26.4% today to 30.6% in 3 years time.
• The bullish analysts expect earnings to reach A$57.3 million (and earnings per share of A$0.6) by about July 2028, up from A$31.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 42.7x on those 2028 earnings, down from 55.6x today. This future PE is lower than the current PE for the AU Software industry at 72.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.91%, as per the Simply Wall St company report.

Objective Future Earnings Per Share Growth

Risks

• The company's strong reliance on government and public sector clients exposes it to the risk of changes in policy, budget constraints, or procurement cycles, which could cause revenue volatility and impact the predictability of long-term revenues.
  
• Heightened data privacy regulations and increasing scrutiny around governance and the use of AI-especially in sensitive government environments-could raise compliance costs and restrict the company's use of data, negatively affecting operating margins and future net profit.
  
• The competitive shift toward cloud-based solutions and ongoing vendor consolidation among mega cloud providers could erode pricing power, making it harder for Objective to maintain revenue growth and potentially compressing gross margins as competition intensifies.
  
• Despite significant investment in R&D, there remains a risk that Objective's innovation pipeline could slow or fail to keep up with rapidly evolving technology and customer expectations, leading to stagnating or declining revenue growth over the long term.
  
• Expansion into new geographies and verticals, while creating opportunities, could also stretch the operating model and increase cost structures faster than the company's ability to generate operating leverage, potentially leading to declining operating margins as scale increases.

Valuation

• The assumed bullish price target for Objective is A$20.5, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Objective's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$20.5, and the most bearish reporting a price target of just A$7.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be A$187.0 million, earnings will come to A$57.3 million, and it would be trading on a PE ratio of 42.7x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of A$18.59, the bullish analyst price target of A$20.5 is 9.3% higher.
  
• 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.