ANZ Public Sector Reliance And Global Scrutiny Will Constrain Margins

Key Takeaways

• Strong reliance on government contracts and a shift to SaaS models create revenue risks, while aggressive global and regulatory environments add further complexity and cost pressures.
  
• Rising competition from global SaaS giants and niche cloud solutions threatens market share, pricing power, and long-term earnings stability.
  
• Accelerated cloud adoption, sustained R&D investment, and a differentiated SaaS+ model underpin Technology One's recurring revenue growth, market share gains, and margin expansion across key sectors.

Catalysts

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

• Technology One's heavy reliance on the Australian and New Zealand public sector exposes the company to significant client concentration risks, and any future deceleration in government IT spending or unexpected policy shifts may result in revenue volatility and limit overall recurring revenue growth.
  
• Intensifying global regulatory scrutiny on data sovereignty and privacy, especially as the company seeks further international expansion, could increase complexity and result in material compliance and platform adaptation costs, placing additional pressure on net margins in the long term.
  
• Heightened competition from multinational SaaS and ERP providers, particularly U.S.-based giants with deeper resources, threatens Technology One's market share as buyers increasingly consider larger, global vendors, undermining both customer retention and growth rates.
  
• The ongoing transition to a full SaaS model, including the SaaS+ offering, may create a multi-year drag on headline revenue and earnings growth as high up-front license and implementation revenue is replaced by slower-building and less predictable recurring SaaS revenues, negatively impacting near
• to medium-term profit growth.
  
• The proliferation of low-code/no-code and vertical-specific best-of-breed cloud solutions is likely to erode the long-term relevance and pricing power of traditional and integrated ERP suites, increasing customer churn risk and putting downward pressure on both revenue growth and net margins in the future.

Technology One Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Technology One compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Technology One's revenue will grow by 15.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 24.1% today to 25.6% in 3 years time.
• The bearish analysts expect earnings to reach A$217.6 million (and earnings per share of A$0.65) by about August 2028, up from A$133.0 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 bearish analyst cohort, the company would need to trade at a PE ratio of 43.3x on those 2028 earnings, down from 95.4x today. This future PE is lower than the current PE for the AU Software industry at 76.8x.
• Analysts expect the number of shares outstanding to grow by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.96%, as per the Simply Wall St company report.

Technology One Future Earnings Per Share Growth

Risks

• Accelerated cloud adoption and the ongoing migration of customers from on-premise to SaaS has driven Technology One's ARR growth above 20%, with a highly resilient subscription base and best-in-class customer retention rates of 99%, supporting consistent and predictable long-term recurring revenues.
  
• Strong investment in R&D (at 20% to 25% of revenues), continuous product innovation, and integration of emerging technologies such as AI and SaaS+ have resulted in deeper vertical market differentiation; this supports premium pricing, cross-selling, and margin expansion, which could drive further growth in net margin and earnings.
  
• Market share gains within key verticals (such as local government, higher education, and utilities) in core geographies like Australia, New Zealand, and the UK are accelerating, as demonstrated by significant contract wins and growing pipelines that expand the company's total addressable market and revenue base.
  
• Technology One's SaaS+ offering, with faster implementation times and a streamlined, fixed-fee model, has increased customer adoption, enhanced satisfaction, and provided a growth flywheel through both higher net revenue retention and increased opportunities for upselling; this could underpin above-market revenue growth and improving cost efficiency, reflected in margin expansion.
  
• The shift toward integrated, all-in-one enterprise platforms and the rising demand for secure, compliant, domestically hosted ERP solutions due to heightened regulatory and cybersecurity requirements have further entrenched Technology One's market positioning, favoring revenue resilience and protecting against margin compression.

Valuation

• The assumed bearish price target for Technology One is A$22.71, which represents two standard deviations below the consensus price target of A$36.92. This valuation is based on what can be assumed as the expectations of Technology One's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$45.7, and the most bearish reporting a price target of just A$18.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$851.4 million, earnings will come to A$217.6 million, and it would be trading on a PE ratio of 43.3x, assuming you use a discount rate of 8.0%.
• Given the current share price of A$38.76, the bearish analyst price target of A$22.71 is 70.7% 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.