Listed@ASX Winter 2020 edition

TechnologyOne Limited ASX:TNE

TechnologyOne's ability to shape-shift to suit the times has underwritten its success.

IT company TechnologyOne (ASX:TNE) is no minnow. The company competes against IT giants from its base in Brisbane’s inner-city Fortitude Valley.

“If you think about ERP [enterprise resource planning], everyone thinks of the multinationals like SAP and Oracle,” says chief executive officer, Ed Chung, in an interview conducted before the COVID-19 crisis. “They’ve got massive, massive scale. But from here in Brissy, we’re writing software that competes with them and beats them.”

“Our global software-as-a-service ERP solution is a broad and massively deep enterprise system,” says Chung, who took over from Di Marco as CEO in 2017.

The company has built a sweet spot in Australia’s local government and higher education sectors. Many Australians use their wares to pay their rates bills, parking fines and dog registrations. Major universities and TAFEs also use the software to streamline student services.

“If you went to a major university or TAFE in Australia, you probably applied through our software, paid fees through our software and, if you were sanctioned, this was probably through our software,” he says.

Chameleon qualities

TechnologyOne has survived and thrived by evolving – completely rewriting its software four times. It started life in ‘green screen’ times, then served the PC era and was there at the birth of the internet. The latest shift has been into a cloud-based, software-as-a-service (SaaS), providing its wares online and typically through an ongoing contract.

“TechOne has only been around 33 years. To completely rewrite our software once is a mammoth task, let alone four times,” Chung says.

Transforming TechnologyOne into a SaaS provider has been a herculean feat. Its software is now available on any device, anywhere, any time. “We’ve made the entire suite available on a phone browser,” Chung says.

“Every step we take is to make it easier for our customers. We don’t know if someone will run a payroll from a beach in Fiji, but you can. It’s all about simplicity.

“Everyone knows the world has moved to the cloud and SaaS. It’s something we saw 10 years ago, but we didn’t know how to get there. But the team is really innovative and they’ve done it. They’ve made this SaaS platform that is so scalable it’s insane. It can run thousands, hundreds of thousands, potentially millions of customers, all from one single global code line.”

Not only has SaaS made life easier for clients, it slashes their costs. Chung says customers lower their IT spend by at least 30 per cent when they move to TechnologyOne’s platform because they don’t need an IT team and don’t need to install software anymore.

“It makes life easy for customers because they buy an iPad or a laptop and their staff log on and they’re away. No more upgrades; we take care of all that. Two [new software] releases a year, it just happens for them.”

Chung says TechnologyOne prides itself on having the most trusted SaaS platform in the world. “We’ve got more certifications than any other SaaS cloud provider.”

Moving customers to the new system is one of its major strategic focuses. Just under 500 of its 1200 customers are now on a SaaS model, and it wants to have transferred all of them by 2023/24.

This is proving to be a major business driver. The company is growing at a rate of 40 per cent-plus a year. Chung says that should continue. “We’re currently executing well and, if we can keep our finger on the pulse and respond to the market and our customers, we will continue that growth as far as I can see.”

The company is also focused on winning new customers and selling more to existing customers. “We want to continue to win new customers. A couple of analysts thought TechOne might be tapped out in the markets we serve here in Australia and New Zealand. But because we’ve got 14 products and each product has over 20 modules there are bucket loads of things you can buy from us – there are more than 300 modules. There are lots and lots of what we call ‘new logos’ we can sell.”

Chung says there are also lots of products they can sell existing customers. “Product penetration is our third prong.”

The investor response to SaaS and TechnologyOne’s strategy has been positive. “We just had our AGM and we’re getting really positive feedback,” he says. “Investors say we have a clear strategy. The thing is, we’ve just got to keep executing and we’ve got strength in execution.”

TechnologyOne has “really, really loyal, long-standing shareholders”, Chung notes, including Colonial First State, Hyperion Asset Management, Pendal Group, Pengana, River Capital, Selector Funds Management and Spheria Asset Management. “They have been on the register as long as I’ve been here [about 14 years]. They love the story and strategy.”

Shareholders can be divided into two camps. The first is analytical and want to know data, including how many customers are moving to SaaS and product penetration. The second group is focused on culture and how TechnologyOne is attracting talent and keeping people motivated. “They’re happy with how we’re progressing and with the things we have put in place to address both those lenses.”

Investor loyalty hasn’t meant easy marking or less scrutiny. Chung says as the company has grown – it now has a market cap of $2.2 billion – scrutiny has risen. “I reckon we had a market cap of about $150 million when I started. The company has obviously grown in scale. And from a market point of view, the amount of pressure, scrutiny and eyes on us has increased dramatically.”

He says he faced tough scrutiny from investors when the board appointed him CEO. This is despite being with the company for more than a decade, including stints as chief financial officer and chief operating officer. “They were steely. They wanted to know about me and how I led. They were really blunt. But the results speak for themselves. So, if we can maintain that, they will continue to be happy.”

Despite growing investor focus, TechnologyOne doesn’t have a dedicated investor relations manager or even a consultant. It does bring in former fund managers to review its roadshow material.

Chung says the company chooses to deal with investors directly. “The COO, CFO are I are in the business day-to-day,” he says. “We are very close to the products we build, the staff we employ and the customers we serve. No one can answer their questions like us. Investors give us feedback from the market and advice; there are no filters.”

TechnologyOne is also known for giving the market projections, including SaaS growth out to 2024 and annual recurring revenue.

“If we don’t put out projections the market can make it up. You’ve got to live with it or address it. We are on the side of putting the projections out.”

Chung admits its goals are ambitious. “If they all fired, all at the same time, we would blow apart the profit numbers,” he says. “But we know we can’t be that lucky. Some things fire faster than others, some things don’t work.”

A major benefit of the projections is transparency. They are the numbers Chung is held accountable for, as are the people below him. They are also communicated to staff company-wide at town hall style meetings. “Everyone becomes aligned to our growth targets.”

Ambitious targets also allow TechnologyOne to be honest with the market if the numbers differ from projections, which helps build credibility. “Being transparent with our long-term projections gives us a baseline,” Chung says. “We are then able to explain any variances from this baseline and what happened. This is the transparent relationship we want with our staff and shareholders. We’re really authentic by putting those numbers out there.”

Offshore emphasis

Overseas expansion is another plank in TechnologyOne’s corporate strategy. It mainly operates in Australia, New Zealand and the Pacific Islands. Chung describes plans to enter the UK market as the next growth engine.

The UK has a similar market to Australia. As it does locally, in the UK TechnologyOne is pursuing the higher education and local government sectors and has 50 customers. “We’re approaching critical mass,” Chung says. “It’s really just about continuing to execute to win more market share from competitors and ramp that up.”

Chung says if TechnologyOne gets the recipe right in the UK, it has a glint in its eye about the US. But he rules out an Asian expansion. “It has different forms of government and vertical markets and it’s not English speaking. It’s not on our horizon any time soon.”

Global expansion should put the company on offshore investors’ radar. Chung says it already has around five international investors from the UK and US in its top 20 shareholders. “I’m sure we will become more interesting to international investors as we become bigger.”

The company doesn’t regularly meet with offshore investors, although it does host conference calls. Chung says he would like to engage with more of them.

TechnologyOne has roadshows around its half and full-year results. It has also started presenting at more conferences in Australia, including for Macquarie Group and Goldman Sachs. The company will seek to present at more international roadshows over time.

But it may be challenging for offshore investors to get large stakes in TechnologyOne given existing shareholders’ loyalty. “I don’t see them leaving because they love the story,” he says.

Capital raisings won’t provide an entry point, because TechnologyOne doesn’t need the money. “The business has huge momentum,” Chung says, adding that recurring revenue is growing and the business is spinning off cash. “Capital is not a problem.”

Chung also notes TechnologyOne hasn’t been highly acquisitive and has been very careful before buying other companies, believing big acquisitions tend to destroy shareholder value. Instead, it makes small acquisitions to buy intellectual property or products that take it deeper into the markets it serves. “It’s a very cautious approach to acquisition.”

Despite looking to increase international engagement, TechnologyOne has no plans to change its approach to IR. “We find direct connection beneficial. Like everything, as businesses scale, you can spread yourself too thin. So hiring an IR executive over time may happen. But for today, it’s really valuable to talk directly to investors and for them to give us feedback.”

So far that strategy is paying off with a loyal shareholder base and growing offshore interest.

COVID-19 increases relevance

TechnologyOne made the cut when Macquarie Equities nominated 14 stocks investors should buy before a post-corona virus rebound. The broker cited a big cash stash of $100 million and its 99 per cent customer retention rate.

The company’s shares have weathered the corona virus storm relatively well, a testament to both its corporate and investor relations strategy.

“We have strong markets, mission-critical software, sound recurring revenue and no debt. So we stick out among a lot of other companies in the market,” says chief executive Ed Chung.

Chung says TechnologyOne’s strength is its focus on six markets that are largely resilient to economic shocks. The markets include local government, government, higher education, ports, airports and power, health and community services and corporate and financial services.

“They have to provide services no matter what,” he says.

TechnologyOne’s other strength - its shift to being a cloud-based, software-as-a-service - positions it well for the massive shift to remote working.

It is perfect for situations like COVID-19 because it’s designed for people to be able to work on any device, anywhere at any time.

Chung says many customers have told them they would have been in trouble if they hadn’t made the change to SaaS.

Half its clients have moved to a SaaS model, while the other half still use on-premise software. Chung says COVID-19 will accelerate the move to SaaS and away from on-premise, as customers seek the ability to work from anywhere at any time. “That’s the opportunity we will be pushing for,” he says.

The SaaS service provides strong recurring revenues and cash flow, Chung says.

But the virus does present challenges for customers. The company has launched a ‘TogetherAsOne’ program, a response to COVID-19 to help in these difficult times.

This includes free online training courses and webinars. It also facilitates discussions with industry groups on how to manage the crisis. Most importantly, it’s waiving its SaaS platform fees for existing on-premise customers who make the switch for a year. SaaS will helps customers cut costs as they look to rein in spending to ride out the crisis.

In particular, its university customers have been hard hit by travel bans that mean many international students are prevented from entering Australia.

Given the strong market response to the company during the virus crisis, Chung says he will be making no changes to TechnologyOne’s investor relations strategy of dealing directly with investors and being honest and transparent.

“We don’t manage the share price,” he says. “But it’s obvious our share price has held up better than most. I put this down to having a really clear strategy. It’s a consistent strategy we’ve been executing since the beginning. We haven’t wavered from that.”

Chung says investors are long term and loyal. “As long as we can consistently execute – and we have – they will stay with us,” he says. “Our strategy and execution and long-term loyal shareholders are why our share price has held up.” The management team will continue to organise investor relations and roadshows themselves. “That will continue” Chung says.