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Boon in software spending lifts ASX-listed IT stocks

Nicki Bourlioufas  |  11 May 2017Text size  Decrease  Increase  |  

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With Aussie businesses spending a record $3.87 billion on software in the December 2016 quarter alone, several ASX-listed companies are set to continue reaping the benefits.

 

The IT sector in Australia is growing rapidly as spending on computer software increases and many listed companies are benefiting from that rising expenditure, highlighted by accounting software company Xero's (ASX: XRO) strong result on Thursday.

Xero reported revenue of $295.4 million for the year ending 31 March 2017, an increase of 43 per cent on the previous year, or 51 per cent when excluding currency movements.

Xero's shares jumped to a two-year high of $21.59 in mid-morning trade on Thursday.

The company turned cash-flow positive for the first time in the second half of the year and Gareth James, a senior equity analyst at Morningstar, says the company is edging closer to profitability in 2020, having grown its customer base by 44 per cent to just over 1 million customers globally in 2016-17.

The New Zealand-based Xero's net loss after tax improved to $69.1 million, from $82.5 million previously.

"The result was in line with our expectations. For Xero, it's all about growing as quickly as possible and to be the number one accounting platform globally," says James.

Xero's strong result and last year's high-profile listing of logistics software company WiseTech Global (ASX: WTC) highlights the flow of money into software companies which have "sticky" software products.

Australian businesses invested a record $3.87 billion in computer software in the December 2016 quarter alone. The seasonally adjusted private computer software spend rose 3.3 per cent in the quarter, a 13.7 per cent jump from a year earlier, according to the Australian Bureau of Statistics.

That expenditure was likely exceeded in the March quarter of 2017 given computer software spending has hit record levels for several successive quarters as businesses strive to reap productivity gains.

This boon has helped veteran cloud-based software provider Xero, whose shares have returned around 43 per cent over the past year, and are currently priced at NZ$22.55, slightly above their fair value of NZ$21, says James.

Xero is one of the S&P/ASX 200's fastest-growing tech companies in terms of revenue growth and subscriber numbers, and it is aiming to carve out greater market share against its arch competitor MYOB Limited (ASX: MYO).

MYOB is also trading around its fair value of $3.60 and its shares have returned about 14 per cent over the past 12 months.

The rising popularity of cloud-based software-as-a-service (SaaS), and the benefits it offers such as lower initial costs, easier upgrades, and the ability to add on other software, has driven much of the growth in software spending.

SaaS companies operate their businesses via a website and sell access to their software via their website.

"In the accounting software market, for example, MYOB used to sell a perpetual license for their software and now they sell SaaS via the cloud, which they've been doing for a while. Xero have always been on the cloud," James explains.

"This is a big positive for many of the companies as they can make more money out of someone if they are on a [monthly] subscription rather than if they pay a one-off license fee, given their clients are often in for the long haul, especially given the high costs of switching to a new provider.

"It's also often easier to sell software if it costs $50/month rather than a one-off fee of $500, for example, which can help their sales. That's why people get so excited about these business models. Very often, the software is very sticky, especially accounting software, and once you've got the client in, they tend not to want to go."

Wisetech, whose shares have risen around 38 per cent over the past year to $6.55, has also ridden the wave of software spending.

"We think it is going to grow quickly, but the market thinks it is going to grow even more quickly," says James.

James says SaaS providers also offer more flexible products as their cloud-based software can typically connect with multiple other software applications.

In striving to become a global platform, Xero is built to take full advantage of the add-on-app marketplace. Several hundred apps can connect with Xero, providing a more seamless software solution for its customers compared to traditional accounting software.

"MYOB is now integrating their software with the ATO. It's almost expected now that any business which uses MYOB, your customers or clients may expect to be invoiced electronically with MYOB and so it can be a disadvantage to your business if you're not using that software," says James.

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

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