Still on track

1H23 RESULT

Need To Know

• Slight NPAT beat, $41m vs ~$39m expected (strong growth, up 24%yoy)
• SaaS Annual Recurring Revenue (ARR) of $316.3m up 40%yoy, driven by increased transition from legacy license fee business
• Guidance for FY23e disappointing, expecting Profit Before Tax growth of 10-15% on FY22 vs expectations for ~16%+

TNE delivered a strong 1H23 result and its 14th year of record first half profit, revenue and SaaS fees, and remains on track for continued record profits. The half saw an acceleration of customers to the SaaS ERP solution, with more than 189 large enterprise customers committing to make the shift in the last 12 months, the highest for any comparable period. The solid result saw confidence to lift the dividend 10% to 4.62cps.

Net Revenue Retention (NRR) was 119%, compared to 114% in the prior period, a sound result given best practice across the market was between 115%-120%. TNE expect to meet the 115% target for the FY23 and beyond. This target allows TNE to double the size of its business every 5 years. Pleasingly, the UK business delivered almost the same amount of new ARR in the 1H23 as it did for the entire FY23 and delivered a profit before tax of $3.0m, up 29%yoy.

Guidance for FY23 seems conservative given the strong 1H result, forecasting just 10-15%yoy growth in Profit Before Tax. Although this range is in-line with historical growth levels, the market is forecasting ~16%+ growth for FY23 as TNE achieves scale and higher margins. Also disappointingly, TNE has not moved its guidance for total ARR of $500m+ by FY26 forward by a year, with the current base of $350.6m, growing at ~20% in FY23 and a similar trajectory in FY24 will see TNE easily surpass the target. We therefore expect an upgrade to this guidance at the FY23 result in November 2023.

Investment View

The result itself was strong and above expectations despite a challenged macroeconomic environment, however the guidance for FY23 will likely disappoint the market. A higher churn rate of 1.6% (although temporary due to the end of ‘on premise’ licenses) is also disappointing and above the target of ~1%. The end market customers predominantly being in government and education however likely remain resilient and the product pipeline growth looks strong to retain and attract more customers.

The stock has been trading at a level where it is priced for perfection. Whilst we believe the company to be high quality and provide consistent 10-15%eps growth for the foreseeable future, we prefer to wait for more opportunistic valuation metrics to become more positive. ~25x EV/EBITDA is a relatively full multiple for the corresponding growth rates.