There are a few quality software as a service (SaaS) shares on the ASX that could be really good ones to look at in May 2021.
SaaS businesses can create attractive recurring revenue at high profit margins, which can generate really good net profit over time as they grow.
The below two businesses are still in the growth phase:
Image source: Getty Images
Xero Limited (ASX: XRO)
Xero is one of the world leaders in cloud accounting software. It is a global business with its offering available in dozens of countries. However, there are a few markets where it offers a particularly strong offering with good integration with the tax systems there. Australia, the UK, New Zealand and North America have hundreds of thousands of users.
The SaaS ASX share's growth has been strong over the long-term. In the FY21 half-year result, Xero's subscribers went up 19% to 2.453 million. The report also saw operating revenue go up 21% to $410 million and earnings before interest, tax, depreciation and amortisation (EBITDA) grew 86% to $120.7 million.
Xero's gross profit margin continues to rise, despite already being very high. It went up 0.5 percentage points to 85.7%. It's that high margin that allows a lot of the new revenue to fall to the next profit line for Xero.
There is still a long way to go with the shift to online accounting, so Xero can be a major beneficiary here.
Management said that the result demonstrated the value its customers attributes to their Xero subscription and the underlying strength of the Xero business model. It continues to prioritise investment in customer growth and product development in line with the long-term opportunity it sees.
Volpara Health Technologies Ltd (ASX: VHT)
Volpara is a SaaS company that utilises artificial intelligence to improve the early detection of breast cancer by analysing breast images (mammograms) and associated patient data. This can provide personalised breast care through clinical decision support and practice management tools. It also aims to provide cost effective reduction of breast cancer deaths.
After strong growth, the SaaS ASX share now has annual recurring revenue (ARR) of around US$18.6 million at the end of the FY21 fourth quarter which included 20% of organic growth year on year.
Volpara estimates that it has at least one software product being used in the screening of approximately 32% of US women for breast cancer. Its average revenue per user (ARPU) now sits at US$1.40, up from US$1.22 at the end of the third quarter of FY21.
The CRA Health acquisition is working particularly well. It has already led to the largest customer win in Volpara's history.
Volpara's gross profit margin is above 86% and rising, making it one of the highest on the ASX.
The company is now shifting to risk and genetics for FY22 as it looks to accelerate its sales growth. It's aiming to provide women with the information needed to make informed decisions – this is planned to begin in October 2021. A new form of patient letter that includes the woman's breast images will be launched at that time, to engage women directly and fill the clinical need that exists in that space.
