Technology One: Growth in Education & Local Government Sectors

About Technology One Limited

Technology One Limited (Technology One, the Group, ASX: TNE) is Australia’s largest enterprise software business and an ASX 100 company. The business was established in 1987 and listed on the ASX in 1999. Today Technology One’s specialty product focus areas are the Tertiary Education and Local Government sectors. The Group provides 1,300 government agencies, universities, and local council customers in Australia and the UK with enterprise software solutions that are available on any device, anywhere and at any time. These features make Technology One’s software solutions easy to use, driving efficiency and productivity by enabling customers to focus on their business and not technology.

Focus on Higher Education and Local Government sectors drives earnings resilience

The key to appreciating the 14.6 percent annual profit growth rate generated by Technology One over the past 10 years is to understand the nature of the Higher Education and Local Government sectors serviced by the Group. Both sectors provide essential services that generate predictable and recurrent income under business models that benefit from operational scale driven by technology.

Higher Education is in high demand throughout the developed world and higher living standards buoyed by economic growth will continue to boost demand for Higher Education services for decades to come. The Higher Education sector is increasingly technology driven and includes various segments including class tuition, online courses, and education apps. Most educational institutions rely on recurring revenue models anchored by term-based tuition fees and online subscription-based platforms. By incorporating technology, educational institutions can reduce operational costs through scale. This means that Technology One’s software is a critical aspect of optimising profitability for educational businesses.

Local Government services are funded by compulsory property taxes and infrastructure charges at the local level that are secured by statutory rights of collection and recovery. Local Government organisations also provide community health, welfare and cultural services. Against a background of rising community expectations, Local Government authorities are increasingly reliant on technology to maintain cost efficiency in the delivery of essential services. This places significant value on Technology One’s technology to streamline Local Government internal operations and enhance service productivity.

Technology One is at the leading edge in providing services to the Higher Education and Local Government markets because it continuously redevelops its software platform by embracing fresh ideas, new concepts and new technologies, rather than retaining dated legacy systems. Over the past 37 years, Technology One has completely redeveloped its software platform from the ground up four times. This explains the $128 million in R & D investment in FY24, representing 25 percent of revenue.

Market dominance likely to continue over the long-term

A key success factor in achieving consistently high shareholder returns for Technology One shareholders is the willingness of management to play the long game in terms of business planning. This is reflected in the absence of formal short-term FY25 earnings guidance. Instead, management have reiterated Technology One’s long-term growth roadmap that includes doubling the Group’s Annual Recurring Revenue (ARR) to $1 billion by FY30. This represents a compound annual growth rate of 15 percent per annum. ARR increased by 20 percent year-on-year in FY24.

Supported by accelerating revenue and profit growth in its UK operations and ongoing rollout of its powerful software solutions in Australia’s Higher Education and Local Government sectors, Technology One’s earnings momentum is likely to continue unabated.

Ending FY24 with $278.7 million of cash and equivalent with no debt, Technology One can grow by bolt-on acquisitions that broaden product depth and market share that drive incremental returns over the long run. It is likely that such acquisitive growth can be funded from existing cash reserves, avoiding shareholder earnings dilution. Given the Group’s 50 to 65 percent dividend payout ratio target, shareholders can reasonably anticipate consistent returns on investment over the long-term.