There are some ASX shares that generate a lot of their revenue from a software as a service (SaaS) setup. They might be opportunities.
The SaaS model can be attractive because it leads to recurring revenue at relatively high profit margins. The business model may also mean high retention rates with sticky clients.
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Class Ltd (ASX: CL1)
Class is a leading provider of self-managed super fund (SMSF) administration software for accountants. It aims to simplify the process by removing complexity and manual back-office processes. Class also looks to provide automation that delivers efficiency at scale.
The business has a retention rate of over 99% in the SMSF accounting space. It's looking to improve earnings by driving efficiency and price opportunities for margin improvement in FY22 and beyond. Ongoing market share growth will come from its multiproduct strategy execution.
The SaaS ASX share is now also offering Class Trust. Accountants are currently using excel and practice management to administer trusts, but Class Trust is helping improve time efficiencies by up to 68%. Investment trusts are the second biggest wealth vehicle outside of super.
Class has also acquired a few businesses to become a market leader in the documentation and corporate compliance space. By revenue, it has a 14% market share of this space. Class continues to look for further acquisition opportunities.
It's also looking for new verticals and opportunities to expand offshore.
Fund manager Spheria thinks that Class is "hugely undervalued", saying:
We remain comfortable that Class' management team has built a platform for solid earnings growth with the launch of the new adjacent Class Trust product and the entry into the documents and corporate compliance space. At 3.2x revenue and 12x EV/EBIT (annualised 12 months going forward) for a growing and solidly profitable cloud software business we believe Class is hugely undervalued.
TechnologyOne Ltd (ASX: TNE)
TechnologyOne is a SaaS ASX share that provides enterprise resource planning software to over 1,200 leading corporations, government agencies, local councils and universities.
It recently released its FY21 first half result which showed revenue from SaaS and continuing business rose 7% to $140.6 million, whilst SaaS annual recurring revenue (ARR) went up 41% to $155.8 million.
TechnologyOne believes that it will see long-term continuing strong growth driven by its global SaaS ERP solution as it increases its penetration with existing customers, adds new customers and expands globally.
Over the next few years, its SaaS and continuing business is expected to grow by approximately 15% per annum, once it has wound down its legacy licence fee business. It also sees its total ARR increasing to more than $500 million by FY26, from its current base of $233 million.
Management said that the economies of scale from its global SaaS ERP solution will see the SaaS ASX share's continuing profit before tax margin expand to 35%.
Morgans currently rates TechnologyOne as a buy with a price target of $10. It think TechnologyOne is valued at 47x FY21's estimated earnings.
