Some of the most exciting businesses on the ASX are tech shares. They could be worth thinking about for your portfolio.
Due to the fact that many technology businesses offer an intangible product, it can mean that their gross profit margins may be very high and growth can be quicker.
Technology businesses are attracting a lot of investor intention and these two ideas could be ones to look out for:
Xero Limited (ASX: XRO)
Xero is one of the world's largest cloud accounting software providers. Over the last decade it has taken the approach of heavily re-investing profit and cashflow back into the business to generate more long-term growth.
Over the last five years, Xero has been one of the best performing S&P/ASX 200 Index (ASX: XJO) shares. The ASX tech share has seen its share price grow by 843%. According to the ASX, it now has a market capitalisation that's north of $19 billion.
The company has generated a lot of business growth to get this far. In the FY21 half-year result it said that it had increased its subscriber numbers by another 19% to 2.45 million.
Those subscribers come from all over the world, though Australia is still the biggest market, which saw 21% growth of subscribers to 1.01 million in the latest result. UK subscribers rose 19% to 638,000, New Zealand subscribers increased 13% to 414,000, North American subscribers went up 17% to 251,000 and rest of the world subscribers grew 37% to 136,000.
The global subscriber growth helped operating revenue rise by 21% to NZ$410 million. At 30 September 2020, its annualised monthly recurring revenue had increased to US$877.5 million.
Xero said that it was being disciplined with its financial management during the uncertain COVID-19 period, which led to "strong" growth of net profit, free cash flow and earnings before interest, tax, depreciation and amortisation (EBITDA). The NZ$71.2 million increase in operating revenue led to a NZ$49.4 million increase in free cashflow for the ASX tech share. This is helped by the fact that Xero's gross profit margin is now 85.7%.
In a signal that Xero isn't anywhere near finished with its growth journey, it stated that it still has ambitions for high growth and it intends to continue to innovate, invest in new products and customer growth, and respond to opportunities.
Volpara Health Technologies Ltd (ASX: VHT)
Volpara is a business that provides an integrated breast health platform which helps provide feedback and also aims to help prevent advanced-stage breast cancer.
This business is another one with a very high gross profit margin. In the FY21 half-year result it reported that its gross margin was 92%. That report showed that revenue rose by 38%, subscription revenue increased 71% and gross profit increased by 43%.
At the time of the half-year result, it had NZ$19.9 million of annual recurring revenue (ARR) and approximately 27% of women in the US had a Volpara product applied on their images and data.
The ASX tech share then released its FY21 third quarter result which showed ARR had risen to NZ$20.7 million and its average revenue per user (ARPU) grew 5% to US$1.22.
A couple of weeks ago, Volpara announced it was acquiring CRA Health in the US for an upfront payment of US$18 million. This acquisition increases Volpara's market share to over 30% of US breast screenings, it increases the ARR to NZ$26.9 million and is likely to increase the ARPU of the business as well.
Management believe that this deal has elevated the company to be a leader in personalised breast care and could spur more growth because CRA's software is integrated with the major electronic health record (EHR) as well as with genetics companies.
