Roy Davidson, 14 February 2019



TechnologyOne (TNE) is a developer and provider of enterprise software (software utilised within an organisation for business functions), with operations in Australia, New Zealand, the United Kingdom, Papua New Guinea and Malaysia. The company has more than 1,000 customers, primary in central government, local government, and the education, health and financial sectors.

A high quality company with a track record of growth

TNE has an impressive track record, with revenue having increased by an average growth rate of almost 15% over the past ten years. Over this same time, net profit after tax has increased by a similar rate. Despite spending more than 20% of annual revenue on research and development, the company generates consistently strong free cash flow and provides very good returns on invested capital. The company currently has a net cash position.

Cloud migration to open up new revenue source and expand margins

The IT industry is experiencing a large shift away from software installed on-premise, towards services being offered from the ‘cloud’. The cloud is where data storage and infrastructure services are done off-premise by a third party, for example, Amazon Web Services. For TNE, this involves migrating customers from on-premise solutions to the company’s cloud offering, as well as offering potential new clients a cloud based service. As the cloud migration continues, this should drive ongoing improvements in earnings before interest and tax (EBIT) margins. This is because the company will be better able to capture economies of scale (for example, by utilising one version of software across multiple customers).

UK business gaining momentum and pipeline looks healthy

After a tough start in the wake of the global financial crisis, TNE is expanding in the UK. It has offices in London and Glasgow and continues to launch new solutions into the market. TNE currently has over 40 customers in the UK and believes critical mass is 50 customers. Management believes this market could be as large as Australia in time (total addressable market is three times as large), while uptake of cloud services in this market is high. Recent management comments also indicate that the pipeline of potential wins is healthy, which should underpin sustained revenue growth for the company. Opportunities include the vocational training market, aged care and local government.

Investment view

TNE’s valuation is relatively full, however, the long-term opportunity for the company is compelling and we see significant potential from TNE’s migration of customers to the cloud, boosting both revenue and margins. This was as demonstrated by the recent strong result where cloud uptake was strong.


  1. key customer losses
  2. security breach
  3. increased competition