Technology One shares drop 18%, but the market may be missing the real story

Technology One shares slide 18 percent, but the cash flow strength tells a very different story

Technology One shares fell every though the company delivered another strong year in FY25. The headline performance was solid. Total ARR increased 18% to A$554M and total revenue also grew 18 percent. However, the long term signals introduced a layer of uncertainty. Net revenue retention eased from 117% to 115%, still very healthy but no longer pushing higher, and profit guidance of 13% to 17% sits below the 19 percent delivered in FY25.

Our read is that investors are not questioning the quality of Technology One at all. This looks like a classic buy the rumour, sell the news moment. FY25 was a genuine beat across the board. Profit before tax grew 19% to A$182M, ARR was up 18% to A$555M, the Rule of 40 reached 59%, and the company lifted its dividend meaningfully, including a 10c special. These are not the numbers of a business losing momentum.

But the stock had been trading at all-time highs on very rich multiples. When a company of this quality has already run as hard as TNE has, even strong results can trigger profit taking if expectations were stretched. The sell-off was sentiment-driven rather than fundamentals-driven. Many long-term holders and analysts still view TNE as one of the best compounders on the ASX, and nothing in these results changes that long-term view.

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What the market may be overlooking

What is being missed in the noise is the strength of TNE’s second growth engine. The UK business is scaling faster than many expected, with ARR up 49%, and it is starting to look like a meaningful contributor to the long term story. For me, this remains a business with high quality fundamentals, but the short term sentiment reset reflects how sensitive software valuations are to even modest changes in momentum.

Where is future growth coming from?

When you dig into the quality of earnings for Technology One, the strength of the model becomes even clearer. Free cash flow jumped to A$184M, a 55% lift, and with around 90% of revenue now recurring, the business has built a level of long term cash flow visibility that few software companies in Australia can match. Churn remains low and the UK operations are beginning to scale through the fixed cost base, which is already showing through in operating leverage.

Research and development spending was substantial again this year, up 20% to A$153M. Around 55% of that was capitalised to reflect multi-year programs including the Councillor platform, UK staffing and localisation. The key point for us is that these investments are translating into tangible commercial outcomes. SAAS adoption continues to rise, and ARR per customer keeps expanding. Both of these drivers are flowing directly into margin growth, which reinforces why TNE’s reinvestment profile is a core part of the long-term value creation story.

The investor takeaway for Technology One

When investors assess any business, the real question is how effectively the company can turn its investments and operating model into long term value. For Technology One, the updated target tells you exactly how management sees the next phase playing out. The company is now aiming for A$1B in ARR by 2030. From A$555M today, that implies a 12% compound annual growth rate, which is entirely realistic given the strength of the model and the depth of the addressable market. TNE estimates a total market opportunity of A$13.5B and it has penetrated less than fifteen percent in any single vertical across APAC. In other words, the runway is far from mature.

Management also made a clear statement about capital discipline. The dividend payout ratio will rise from 55 to 65%, up to a new range of 65 to 75%. For us, this signals confidence in future cash generation and a deliberate push to return more capital to shareholders while still reinvesting in the long term growth engine.