ReadyTech (ASX:RDY): Its tech peers are swimming but this stock is sinking! How can it turn around?

ReadyTech (ASX:RDY) has followed a different course to many other tech stocks on the ASX, holding firm as interest rates fell, but now declining as many of its peers are recovering.

The key catalyst is that it just downgraded a future revenue target. And you could also argue that it might be falling behind other stocks talking about AI more than it is. But let’s delve into the deeper picture.

 

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Who is ReadyTech?

ReadyTech provides SaaS technology in Australia and operates in three segments: Education, Workforce Solutions and Government and Justice.

The Education segment offers cloud-based student and learning management systems for education and training providers to manage the student lifecycle, including student enrolment and course completion. This segment also provides platforms to help state governments manage vocational education and training programs.

The Workforce Solutions segment offers payroll software, outsourced payroll services and human resource management software solutions to assist employers with payroll and management of their employees in mid-sized companies.

The Government and Justice segment offers government and justice case management SaaS solutions to local and state governments as well as justice departments. It also provides asset management, property, licensing and compliance, finance, HR and payroll, and customer management products.

ReadyTech was founded in 1998 and listed on the ASX in 2019 at $1.50 per share. Although it is off its all time highs, it is still ahead of its IPO price.

COVID-19 has increased the demand for digital transformation – and the growth is not over

Organisations in all three segments of ReadyTech’s business – Education, Workforce and Government – are experiencing a growing and ongoing migration to cloud and SaaS. This digital transformation across all industries is nothing new, but what is news that this transformation has been accelerating in the wake of COVID-19 shutdowns as demand soared for technology-driven initiatives to enable remote work, distance learning, new customer experiences and new online sales channels.

But it is only just getting started. Goldman Sachs has estimated that transition from on-premise systems to Cloud software is just 20% completed. It also estimated that annual revenues are US$235bn compared to enterprise IT revenues of US$1.4tn and the Cloud could easily grab that and even more from non-digital spending.

ReadyTech is well-positioned to benefit from the opportunities created by the accelerated digital transformation. The company is investing more than 30% of its revenue in research and development activities to align its products with different customers, including larger enterprises, where it can open up new market opportunities for its businesses. It has also engaged in M&A activity to make itself a ‘one-stop shop’ for its clients.

Good FY24 results but FY25 was a step back

In FY24, the 12 months to June 30 2024, ReadyTech recorded $113.8m in revenue ($95.4m of which was subscription revenue), a figure up 10% from the year before. The company boasted 22 major enterprise contract wins across all segments worth $12.5m. Average revenue per new customer was $119.1k.

ReadyTech’s underlying EBITDA was $38.8m, up 11.5% and representing a 34% margin. Its profit was $5.5m, up 9%. The company has advised shareholders to expect organic revenue growth to be in the low to mid double digits and a 34-35% EBITDA margin. It told investors it was aiming to achieve over $170m in organic revenue in ‘the medium term’ and a cash EBITDA margin of over 20%.

FY25 results appeared to be another step forward at first glance. Revenue grew 7% to $121.8m, of which 84.3% was recurring revenue. It purported to have signed $15.4m worth of enterprise contracts and the average revenue per customer was $166.9k. For FY26, the company told investors to expect $132-135m revenue and for $150-153m in FY27. Good growth, so why the fuss? Well, the company previously promised investors >$170m. So, yeah.

No explanation appeared to be given in the investor announcement. Perhaps what also worried investors was that expenses rose 9.8% to $82.3m, leading to the EBITDA margin to retreat from 32.5% to 34.1% and its profit margin to shrink from 7.3% to 7.1%. To be clear, the profit and EBITDA figures were higher, but they did not grow as fast as revenues.

What about AI?

All companies need to talk about AI, otherwise they risk losing investor sentiment. The company told investors it advanced seven AI product initiatives in FY25, including its first AI agents. Other initiatives included Talent IQ for workforce management, Recognition of Prior Learning (RPL) for education and Planner Assist to accelerate Local Government development approvals.

These sound all well and good, but you could ask why the compny downgraded its revenue target if it was so confident in them It was one thing to downgrade profit guidance (had there been any) due to one-off investments, and also to talk about ‘high conviction’ opportunities, but investors want to see AI initiatives that will make a substantiual difference to the top and bottom lines, or at least that companies are confident will make a difference.

ReadyTech’s valuation is attractive, but you might be better off buying TNE

There are 7 analysts covering the stock and their mean target price is $3.62, which is a fair premium to the $2.40 level it retreated to after its results. In FY26, they call for $138.1m revenue and $47.1m EBITDA. Then in FY27, $156.2m revenue and $53.7m EBITDA. The company’s multiples for FY26 are 8.1x EV/EBITDA, 15.9x P/E and 0.5x PEG.

This would suggest upside. But remember that it has been less than 3 years since attempts were made from Pacific Equity Partners to take it over at $4.50 per share ($308m at the time) and it was declined for undervaluing the company. Microequities Asset Management was key to it and it declared to the AFR that ‘ReadyTech is a TechnologyOne in the making’. For comparison’s sake, TechnologyOne (ASX:TNE) then had a $10bn market cap and is now $13.2bn. Meanwhile, RDY is below $300m, it has barely budged.

Now, it did take TNE about a decade to reach the levels it is at today – implying that ReadyTech has some way and time to go before reaching this valuation. But we think we need to see some margin growth before that happens. TNE’s 1H25 margin was triple RDY’s at 21% post-tax, 28% pre-tax.

Margin improvement will be key and the company’s AI offerings could help in this regard. But competition will be tough.

Frequently Asked Questions about ReadyTech

• Is ReadyTech Holdings an Australian company?

  Yes, RDY is based in Pyrmont, NSW.

• Does ReadyTech Holdings pay a dividend?

  No, the company uses its funds to grow its business for the foreseeable future.

• Is ReadyTech Holdings a BUY right now?

  No, we think TechnologyOne is a better buy right now.