Business enterprise software systems developer Technology One (ASX: TNE) has been a consistent grower over the past 10 years, both in revenue and earnings, and over the past six months its share price has gone up about 35%. What has been driving this movement?
In business software, there are different platforms depending on the size of the business, with smaller companies possibly using MYOB or Reckon (ASX: RKN) and large corporations using Oracle and SAP. Technology One places itself mostly in the mid-market level, but with the new version of its Connected Intelligence (Ci) platform, it is pushing its coverage into the large corporate level as well.
Over the past 10 years, net profit after tax has risen from $7 million to $26.9 million for a compound annual growth rate of 14.4%. Over 60% of its revenue is generated from existing customers, and due to the nature of business software, customers usually don't change much once they choose a system.
In 2013, its client base expanded by over 50 new customers, 15 of which actually switched over from either Oracle, Microsoft or SAP.
It is moving to cloud-based platforms with its Technology One Cloud system to give customers full access by whatever device they choose, all through a browser-based portal. It is due to be launched in mid-2014.
Its Ci2 platform and cloud system will be updated through its enterprise app store, so customers won't have to do major upgrades. Clients will also be able to forego setting up their own server networks if they wish, making Technology One Cloud an even more attractive and cost-effective solution.
The company is very low geared, with gross gearing at 6.1%, and has about $65 million in cash. In 2013, it achieved a return on equity of 30.7% and its net profit margin was 15.1%. Even with those impressive numbers, it is still able to afford putting about 20% of its total revenue towards R&D to stay on top of its game.
Foolish takeaway
As the largest Australian-based software developer, it has kept its growth strong, through the dot com boom and bust, as well as the GFC. Because it is taking that next vital step to move its business systems into the cloud, it is staying relevant and strong for future growth.
IT companies sometimes have sky-high valuations or price-earnings ratios because investors are looking for potential earnings and growth if everything goes right. This company has been delivering solid performance for over 10 years, and with a track record like that, you can understand why its share price is up so much.
