Integration Of CourseLoop May Strengthen Market Presence Amid Analyst Concerns

Key Takeaways

• Integration of CourseLoop into their ERP suite aims to enhance market presence and boost revenue in the education sector.
  
• Adoption of the SaaS+ model and U.K. expansion drive long-term recurring revenue, while higher dividends support growth investments.
  
• Strategic expansion in SaaS+ offerings and strong market entry, coupled with high R&D investment and no debt, positions Technology One for sustainable growth and profitability.

Catalysts

Engages in the development, marketing, sale, implementation, and support of integrated enterprise business software solutions in Australia and internationally.

• The company's recent acquisition of CourseLoop and focus on integrating it into their ERP suite for higher education is expected to deepen their market presence and drive additional product revenue, particularly in the education sector.
  
• The significant investment in R&D, which accounts for 20% to 25% of revenue, is intended to fuel continuous innovation and expansion of the product suite. This move is expected to drive future revenue and potentially improve profit margins as new product offerings materialize.
  
• Their pivot to the SaaS+ model, which includes both software and implementation in a single fee, is anticipated to result in deferred revenue recognition and impact short-term earnings; however, it positions them for more stable long-term recurring revenue growth and potentially higher margins.
  
• Expansion in the U.K. market, highlighted by substantial growth and localization efforts, is anticipated to contribute to ARR growth due to increased penetration and adoption of their SaaS+ solutions within the local government and education verticals.
  
• The shift to a 55%-65% dividend payout ratio provides flexibility to allocate more capital towards growth initiatives, including strategic acquisitions, which could enhance earnings growth by expanding their product offerings and market reach.

Technology One Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Technology One's revenue will grow by 14.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.3% today to 26.0% in 3 years time.
• Analysts expect earnings to reach A$198.6 million (and earnings per share of A$0.6) by about December 2027, up from A$118.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$220.8 million in earnings, and the most bearish expecting A$169.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 55.4x on those 2027 earnings, down from 84.6x today. This future PE is greater than the current PE for the AU Software industry at 43.0x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.91%, as per the Simply Wall St company report.

Technology One Future Earnings Per Share Growth

Risks

• The increase in annual recurring revenue (ARR) by 20% and record profit growth of 18% indicates strong revenue growth, which could contradict expectations of a share price decline.
  
• The company's strategic focus on expanding its SaaS+ offering and successfully entering new markets like the U.K. might drive higher revenues and profit margins in the long term.
  
• Significant investment in R&D, equating to 25% of revenue, positions Technology One for continued innovation, potentially leading to sustained revenue growth and improved net margins.
  
• With a net revenue retention rate of 117% and a strong pipeline for 2025, the company demonstrates a robust ability to retain and expand its customer base, which should positively impact earnings.
  
• A strong cash position and no debt provide financial stability, allowing for strategic acquisitions and growth opportunities, which could lead to enhanced revenue and profitability.

Valuation

• The analysts have a consensus price target of A$27.45 for Technology One 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$35.0, and the most bearish reporting a price target of just A$15.36.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be A$762.5 million, earnings will come to A$198.6 million, and it would be trading on a PE ratio of 55.4x, assuming you use a discount rate of 6.9%.
• Given the current share price of A$30.51, the analyst's price target of A$27.45 is 11.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.