Xero offers software that helps SMEs do business. It has over 3 million subscribers, and primarily sells accounting software that helps businesses keep books, pay bills and send invoices. But it has gradually developed features useful beyond book-keeping, such as storing files, converting currencies, keeping track of inventories and creating professional quotes.

Clearly, Xero is an essential service to its customers….it’s very hard to switch it off just to save a few bucks. And what incentive is there to switch to another solution like a MYOB? Very little. Whatever few bucks would be saved, would be lost in the long run. Xero’s tools are estimated to save its customers on average 5.5 hours of manual work per week. We guess that is why its churn is less than 1%.

In FY24 – the 12 months to March 31, 2024 – the company recorded:

• NZ$1.7bn in revenue (up 22%),
• 4.16m subscribers (up 11% and 419,000 from 12 months prior),
• $39.29 in average revenue per user (up 14%)
• An 88% gross margin
• A $174.6m profit (compared to a $113m loss in the year before).

The company believes it can grow further. It is aiming to double its revenue to NZ$3bn by FY27 and has told investors that the TAM (Total Addressable Market) is NZ$100bn. This might even be an understatement because that is just the top 3 jobs its software is used for – Accounting, Payroll and Payments. Adjacent Tasks, including other tasks such as inventory, CRM and project management, could be another $39bn.

ReadyTech (ASX: RDY) is in our view one of the best tech stocks on the ASX. It has a track record of growth, serves inflation-proof end markets and is set for good growth in the years ahead.

ReadyTech provides SaaS technology in Australia and operates in three segments: Education, Workforce Solutions and Government and Justice. It offers various cloud-based solutions that help their clients with administration and management. 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 well ahead of its IPO price.

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. We think the trend is still in early days and that ReadyTech is poised to derive a benefit.

In FY24, the 12 months to June 30 2024, ReadyTech recorded $113.8m in revenue (up 10%), EBITDA was $38.8m (up 11% and representing a 34% margin), while the company's profit post-acquisition was $16m (up 6%). The company boasted a highly sticky customer base that is willing to pay a premium for its services.

For FY25, ReadyTech has advised shareholders to expect a 34-35% EBITDA margin. It has a pipeline of $170m in revenue by FY27.

Infomedia (ASX:IFM) is one tech stock that was unfairly sold off during the tech-wreck, but is gradually rebounding with a vengeance. The company has a long-term track record of growth, has remained profitable and is at the forefront of several trends in the automotive industry.

IFM provides cloud-based parts and service software to the global automobile industry. It has over 250,000 active users in 186 countries and it has a healthy geographical mix of revenue (37% from the Americas, 32% from the Asia-Pacific and 31% from Europe). Infomedia can help its customers capture data, provide more personalised service to existing and would-be customers and monitor supply chains.

It has had some difficulties during the pandemic including the difficulty of business development during pandemic restrictions, the volatility in car sales and potential takeover bids falling through.

Turning to FY24, the company made $140.8m in revenue (up 8%) and a profit of $20.9m (up 26%). It closed the period with $70m cash in hand. It paid a dividend of 4.2c per share. For FY25, it has guided to $144-154m, subject to the macroeconomic environment remaining largely unchanged.

We think the company can capitalise on several trends being adopted in the automotive industry including electric vehicles, the dealer agency business model and data-driven marketing.

Breville is a premium kitchen appliances business with a presence in Australia, Europe and the Americas. It was founded in 1932 – founded from capital obtained from a successful 4-to-1 bet at the 1932 Melbourne Cup.

Breville sells ~$1.5bn in goods each year in over 100 countries globally and caters to middle to higher income earners. It is headquartered in Sydney, has manufacturing facilities in China and regional offices in key markets.

Breville listed in 1999 and has achieved growth of over 2000% since. In the last 10 years, it has gained more than 250%. In FY24, it generated $1.53bn in revenue (up 4%), $185.7m in EBIT (up 8%) and a $118.5m NPAT (up 7.5%). It recorded a 35% gross margin. The 4% revenue growth is hardly earth shattering, but follows revenue growth of 19-25% during the 'COVID years'. It paid a total dividend of 33c per share, representing 40% of EPS and a yield of 1%.

The company was impacted in the aftermath of the pandemic due to fears that inflation would impact consumer demand and the company's costs, not to mention the company's inventory uplift. Neither of the former two came to pass, while the latter issue has been resolved.

We think there are four reasons why Breville can grow. First, it’s track record of sales growth with 14.6% CAGR in EBIT over the last seven years. While this isn’t a guarantee it can achieve the same results, it does inspire confidence. Second, the company’s experience in successfully entering new markets. The company estimates 70% of its revenue potential is unaddressed and it could ultimately achieve $9.7bn in revenue.

The third reason is the market the company is in. Breville offers premium and functional goods, targeted at consumers with higher disposable income. It is therefore less likely to be hit by a slowdown in consumer spending, at least to the extent of companies targeting lower incomes. Consumers feeling the pinch might view upfront investments in Breville’s products – coffee machines, ovens and juicers – as saving money in the long run. And consumers already with appliances and needing new ones won’t put off purchasing a new one for too long. Fourth, we observe that Breville has not had the same supply chain issues other companies have had. Unlike Kogan (ASX:KGN), Breville did not over-invest in new inventories predicting the boom would go on indefinitely.

Universal Store is a chain of casual fashion stores aimed at Millennial and Gen Z customers (think 18-35 year olds). Universal Store has 79 stores across Australia, which tend to be in major shopping centres, as well as a further 20 or so stores exclusive for particular brands like Perfect Stranger, and the group makes 14% of its sales online. Both curated third-party products and private brand products are sold in-house, although the former dominates.

It is a good business but has been hit by perceptions that its customers will cut back their spending because they feel the brunt of the cost of living crisis. We think the recent Taylor Swift shows and the merchandise spent by them (estimated to be over $60m at the concerts alone) show that they will still spend when they perceive value.

In FY23, total Sales were up $263.1m, up 26.5% overall, although like-for-like sales were only up 1.2%. It made underlying EBIT of $40.4m, up 24%) and an NPAT of $23.6m, up 15%. Not bad in the rising interest rate environment. This was because the company was better able to manage inventory and offset the costs of doing business. We are optimistic for further growth in the next 12 months as the Stage 3 Tax cuts come into effect. The revised package will put more money into the pockets of Universal Store's customer base.