There are some S&P/ASX 200 Index (ASX: XJO) tech shares that may be good ideas to consider for the long-term with their growth plans.
Technology businesses can have higher-than-average profit margins if they deliver a product that is software based. It can be quite cheap for a business to replicate a piece of software, rather than having to make and ship a new table or TV.
These businesses are expecting more growth of both revenue and the profit margin over time:
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TechnologyOne Ltd (ASX: TNE)
TechnologyOne is a rapidly growing, large software as a service (SaaS) company. It provides enterprise resource planning (ERP) software.
The ASX 200 tech share is investing in research and development (R&D) to increase its functionality and capabilities. One example is its new local government digital experience platform. It will "revolutionise how residents interact with councils". TechnologyOne believes this will create an additional long-term platform for future growth.
The UK is another region that that could provide long-term growth. TechnologyOne says that it's on track to deliver strong growth in the UK in FY21 with "significant" growth opportunities in the coming years.
TechnologyOne is expecting see its SaaS annual recurring revenue (ARR) to grow by more than 35% over the full FY21. In the first half, SaaS ARR was up 41% to $155.8 million.
Over the long-term, TechnologyOne sees its total ARR increasing to more than $500 million by FY26.
The ASX 200 tech share also said the economies of scale from its global SaaS ERP solution will see its profit before tax margin improve to 35% over time.
The broker Morgans currently rates TechnologyOne as a buy. It's valued at 44x FY22's estimated earnings according to Morgans and it rates the business as a buy.
Altium Limited (ASX: ALU)
Altium is a leading electronic PCB design software business. It's already one of the leading players in the world and it wants to dominate the industry in the years ahead.
It has a number of software offerings including Altium Designer, Octopart and Altium 365.
Altium recently attracted the attention of Autodesk, one of the world's biggest software businesses. There was a formal bid of $38.50 per share, and informal talk of potentially more. But it came to nothing.
The ASX 200 tech share's management believes that the value of the business is significantly higher.
In justifying the takeover rejection, Altium stated:
Altium's strong track record of setting ambitious long-term and achieving them, gives the Altium board confidence in the company's ability to pursue its transformative strategy for the electronics industry and to achieve its 2025 financial goals. Having successfully pivoted to the cloud, Altium is now well positioned to pursue market dominance and industry transformation. The adoption of Altium's cloud platform is transforming Altium's business model from maintenance-based subscription to capability-based SaaS subscription.
In 2025, the business is aiming for $500 million of revenue with 100,000 subscribers. These numbers are set as a measure of dominance. It's also aiming for an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of between 39% to 44% by 2025.
The cloud platform of Altium 365 is a key part of the ASX 200 tech share's plans which could unlock both indirect and direct monetisation. Direct possibilities include things like premium services (like Amazon Prime) and transaction fees (like Airbnb).
According to Commsec, the Altium share price is valued at 55x FY23's estimated earnings.
