Technology One’s (ASX: TNE) profit before tax increased 9%, driven by 17% growth in annual recurring revenue and some margin compression from promotion expenses for its new artificial intelligence products.

Why it matters: Pretax profit growth is tracking below unchanged full-year guidance of 19% at the midpoint. Management attributed the lag to its relatively costly showcase marketing event and the timing of some new ARR growth, which was toward the end of the half.

  • Net revenue retention, which includes churn, downgrades, and upsells within existing customers, was reasonably strong, in our view. NRR for the period was 114%, or 116% in constant currency. This represented an improvement from the second half of fiscal 2025, when NRR stood at 113%.
  • Growth is becoming less diversified, however. Only the local government segment—the company’s strongest and largest at around 40% of ARR—grew above the group average, at 27%.

The bottom line: We maintain our fair value estimate for narrow-moat Technology One of $22 per share. Despite shares having fallen around a third since their peak in 2025, shares screen as overvalued.

  • We believe the market continues to extrapolate high top-line growth numbers from recent years, which were artificially high due to above-target inflation, public sector hiring, student volume recovery, and dwelling price appreciation, all of which flow through to pricing.
  • Our fair value estimate implies a forward P/E multiple of 45. Although this may seem high for a company with a mature margin profile, we believe it can increase revenue at strong, low double digits over the next decade, mostly through upselling existing customers.

Big picture: The company’s local government segment remains exceptionally strong, but it now seems to have definitively run out of significant incremental growth levers, as other expansions into different geographies, verticals, service levels, and product categories are slowing significantly.

Business strategy and outlook

We expect Technology One’s strategic focus to revolve around increasing the number of products used by its local government and education customers in Australia and New Zealand, including its SaaS+ and artificial intelligence products. To a lesser extent, we expect Technology One to focus on vertical expansion and geographic expansion into the UK education market.

Technology One has been highly successful in capturing the Australian and New Zealand market for enterprise resource planning software, and we expect this to continue. Technology One’s products are used by councils representing around 75% of Australia’s and New Zealand’s populations, as well as higher education institutions representing around 60% of students in the UK and ANZ. We expect these customer verticals to remain the focus as Technology One continues growing its market share in these verticals and develops a broader suite of ERP products for them.

In other verticals, such as the federal government and health, Technology One has been comparatively less successful in penetrating the market, and we don’t expect this to meaningfully improve. Technology One’s products are used by around 25% of federal government organizations in Australia and New Zealand, and less than 5% of health and community services organizations. We attribute the difference to a lower level of product-market fit. Federal government customers, we believe, have a scale that makes them highly attractive targets for nonspecialized enterprise resource planning providers, which compete heavily. Health customers have more specialized requirements that specialized health ERP providers can better serve, in our view.

We downgrade Technology One’s Moat Rating to Narrow

Technology One’s switching costs are most strongly evidenced by its retention rates. Annual customer retention in Technology One’s recurring business segments has averaged over 99% during the past decade, a world-leading score in the space. Similarly, net revenue retention for Technology One’s core product suite, which includes churn, downgrades, and upsells, has averaged more than 110%, indicating that the company is not only capable of retaining its customer count, but that it is also capable of retaining (and growing) the number of products and modules its customers use.

The potential risk from AI prevents us from awarding a wide economic moat. As the cost of developing software collapses, we see two effects that may negatively affect Technology One’s business. First, we expect lower development costs to enable the economic development and implementation of point solutions, which could chip away at the current competitive advantages enjoyed by the integrated suite of applications. Although this isn’t our base case, the impact of such a breach would be material, as it would expose all modules to competition. The second impact we expect is more competitive encroachment from overseas peers, like Oracle and SAP, who may mount a wholesale offensive for the entire suite of applications. Although Technology One currently enjoys a significant competitive advantage from a more tailored suite of applications to the vertical and geographic niches it serves, there is a risk that these advantages are rendered moot if the cost to replicate them collapses.

Technology One’s impressive retention metrics are principally supported by the nature of its products. Technology One focuses primarily on software for enterprise resource planning. Across our coverage, we find this type of software to be especially sticky. We attribute this to several factors. First, ERP software enables mission-critical processes, such as management accounting (forecasting and budgeting), human capital management (hiring and retiring), financial accounting (payments and receivables), and supply chain management (procurement and inventory). Not only does this type of software come with switching costs from required technical implementation and staff training, as is typical of most software, but switching ERP software providers also entails significant risk to the business, as the business may run out of critical resources to run the business, such as human capital, inventory, or cash. Additionally, given their back-office nature, ERP systems do not provide businesses with competitive differentiation, in our view, thus providing little benefit to compensate for these costs and risks. We further find that ERP systems are typically run as a suite of integrated applications, which allows for information to flow easily through an organization, such as information from sales orders being used by procurement to purchase the required raw materials, by accounting to invoice the customer and pay the suppliers of raw materials, and by human resources to manage the workforce. We believe that as the number of touch points an ERP software provider has within a business increases, the stickiness of its product ecosystem compounds nonlinearly. We believe Technology One’s constantly growing number of products per customer, at over six products on average currently, delivers significant business value to customers and, correspondingly, benefits the firm from associated switching costs.

Technology One’s strong customer retention is only possible due to the high quality of its customers. Over half of Technology One’s revenue is derived from the government directly, of which over two-thirds is local government and one-third is federal government. Another 25% of revenue comes from the education sector and 10% from the health and community services sector. These (semi-)government customers have low business failure risk, given that they possess strong pricing power versus their own customers, their citizens, in the form of taxation. Although citizens can vote and express discontent through freedom of expression and assembly, we believe the indirect nature of government services delivered and paid for means governments inherently have low budget cyclicality, especially compared with corporate or household budgets.

Further supporting Technology One’s customer retention and economic moat is the level of service it provides alongside its products. Contrary to overseas competitors, Technology One is not a pure software company. Instead, it takes effective ownership over implementation and support, which allows its customers to avoid having to be responsible. We believe this white-glove service is valued highly by its (semi-)government customers and raises the cost of doing business across the landscape.

We believe Technology One’s market share in its core customer segments provides additional competitive advantages. In its largest customer segment, local government, Technology One’s products are used by councils representing around 75% of Australia’s and New Zealand’s population. We see several advantages emanating from this, such as proximity to the customer, enabling fast recognition of changing customer needs, scale advantages in development costs for new features, smooth distribution through existing sales relationships, and low-cost implementation for additional modules. Most importantly, however, in our view, is that government organizations naturally self-select for risk-averse personality types, who also experience little career risk from failing conventionally. Technology One’s dominance in the local government sector, therefore, in our view, displays traces of network effects or reputation-based intangibles, although we do not award this as a separate moat source. The edge in development and implementation costs may also wane over time, given that advances in AI can close the gap for trailing competitors.

Additionally, Technology One’s second-largest customer segment, education, provides the company with some first-mover advantages, in our view. Australia, due to its proximity to fast-growing Asia, has long had the highest share of international students as a percentage of the overall student population, at around 30% currently, compared with around 20% in the UK and around 5% in the United States. We believe this exposure has created demand and resources for Australian universities to move up the technology maturity curve sooner than their overseas peers and, correspondingly, has accelerated Technology One’s industry-specific product development. Technology One’s products are today used by universities representing 60% of students in ANZ and the UK.

Finally, Technology One heavily advertises to customers that its products are Australian-made. Given that most of its customers are Australian (semi-)government organizations that want to support local employment and place more trust in locally stored and protected data, we believe this is beneficial, though not sufficient to be worthy of a moat in isolation.