This is what happens when investor expectations get ahead of themselves. Billing software maker Hansen Technologies has posted a thoroughly impressive result, yet its share price fell 5%.
Revenue increased 40% thanks to organic growth and last year's acquisition of TeleBilling, a Demark-based developer of customised billing software for the telecommunications industry (see Hansen takes on Europe).
Several new utility clients joined Hansen during the year and management noted an ‘unusually high period of organic growth’, with billing revenue rising 10% even after removing the contribution of TeleBilling.
Organic growth strong
Operating leverage boosts margins
Special dividend declared
Billing software sits at the core of an organisation and it takes a significant amount of time – and cost – for a utility to switch providers. For this reason, customers tend to be ‘sticky’.
That Hansen was able to pry new customers away from competitors rather than rely on contractual price increases to grow is a testament to its strong competitive position and reputation. Nonetheless, we won’t get too carried away with this year’s level of organic growth; mid-single digits is about the most we can expect over the long term.
Thankfully, that’s more than enough. Hansen also benefits from economies of scale and operating leverage due to a large proportion of its costs being fixed, which means that a little more of each additional dollar of revenue falls to the bottom line.
|Year to June ($m)||2016||2015|| /(–)
|Final dividend||4.0 cents, fully franked, (unchanged)
ex date 4 Sept
The 40% increase in revenue flowed through to a 45% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) and a 54% increase in net profit. The company’s EBITDA margin has risen for three consecutive years, from 24.7% to 30.5%.
Hansen earns more than two-thirds of its revenue in foreign currencies, yet incurs a significant proportion of its cost in Aussie dollars, so the company also benefited from the lower Aussie dollar. However, as Hansen expands overseas, costs are increasingly matched to revenue currencies so the impact on margins is falling.
Management expects revenue of $165m–175m in 2017 with an EBITDA margin between 25% and 30%. Organic billing revenue growth is expected to be 4–8%.
The board declared a 1.0 cent special dividend in addition to a 3.0 cent normal dividend in light of the strong result and the availability of excess franking credits.
Hansen has almost tripled since we upgraded it to Buy on 29 Oct 14 (Buy – $1.52) and trades on an underlying price-earnings ratio of 27. With a clean balance sheet, captive customers and stable, growing cash flows, the company is going from strength to strength and we continue to recommend you HOLD.
Disclosure: The author owns shares in Hansen Technologies.