Australian software company TechnologyOne will begin a three-year process to lay the groundwork for ambitious US expansion plans, as its ten year old UK operations approaches profitability for the first time.
Speaking to The Australian Financial Review as the 29-year-old company – valued at $1.6 billion – released half-yearly results which reaffirmed guidance for 10-15 per cent full-year profit growth, founder and CEO Adrian Di Marco said the company would take a measured approach to entering the potentially lucrative US market.
This will involve opening up a US research and development centre in 12-18 months, to ensure its software works properly with US regulations, ahead of a launch within two or three years.
"We have not fragmented our code line, it is one global codeline that we have built here in Australia, that is exactly the same code that runs in the UK, so we have actually already done the globalisation of the product from that regard," Mr Di Marco said.
The US plans will provide investors with a clear view of the company's continued path to potential revenue and profit growth, with it already continuing to be a strong performer in the first half of the year.
TechOne's half-yearly numbers showed continued strength in its cloud-based software as a service offering, which it calls Cloud 5.0. Cloud services fees were up by more than 100 per cent on the previous year.
Net profit before tax was down 17 per cent to $9.4 million, due to total expenses being up 16 per cent, however it said total expenses will come down dramatically over the full year.
Its revenue was up 12 per cent to $101 million.
Global competitor
The company competes against global tech giants like Oracle and SAP in sectors including education, local government and medium-sized enterprises, and expanded into the UK a decade ago.
Mr Di Marco said the company had initially under-estimated the amount of work and investment required to crack an overseas market, but that it was now achieving 50 per cent annual growth in the UK and would break even there this year, ahead of moving into profit next year.
However, despite the eventual overseas success Mr Di Marco conceded that he viewed his decision to launch in the UK first, rather than the US, as one of his biggest mistakes in almost three decades running the company. He said he allowed "cultural cringe" about the ability of an Australian tech company to take on the US to make him be talked out of trying.
"When we first started the business the biggest problem people had with us was that we said we were going to be competing against big multinationals like Oracle and SAP, and the cultural cringe means people don't want to believe that our products can be better than ones from these big American companies," he said.
"People had said to me that we shouldn't go to the US because we would be competing in Oracle and Peoplesoft's heartland and I let people convince me, which I regret.
"I now look at all the effort and money that we have put into the UK and I think it actually wouldn't have been any harder in the US and it would have been a much bigger market … I definitely think we would be a much bigger company today if we had gone to the US first."
Succession planning
Earlier this year Mr Di Marco flagged plans to begin a process of succession planning for a move away from the CEO role he has held since the 1980s. He said no timeframe was currently in place, but that the company had already made structural changes to try to develop executives into ready-made replacements.
This has included appointing a chief operations officer for the Asia Pacific region, Edward Chung and a similar position in the UK. Mr Di Marco said he hoped his eventual successor would be an internal promotion rather than an external hire, and that his future role within the company was still undecided.
"Whether I stay involved just depends on how the business is going, how I'm going and also what the investors want. I'm very open-minded with this kind of stuff and we are looking at examples of what other companies have done in this kind of thing," he said.
"If you look outside the IT industry locally, for example, then there is Harvey Norman where Gerry Harvey has moved into an executive chairman role and that has worked exceptionally well and Westfield has done the same thing … but how appropriate that model is can vary from company to company."
Mr Di Marco also said TechOne had observed its large rival Oracle, where founder Larry Ellison became chairman and appointed two co-CEOs – a strategy he doesn't favour – but liked the idea of possibly becoming a chief technology officer to ensure the ongoing direction of R&D investment.
Cloud growth
He said the company was in a strong position because it had reinvented itself and its product to fully embrace the trend towards cloud-based software.
Its cloud division remains a major driver of revenue growth, and Mr Di Marco said its move had left both Oracle and SAP floundering, and left it competing more with fast-growing US rivals like Workday and Netsuite.
Workday's co-founder and chief executive, Aneel Bhusri, recently told The Financial Review it was sharpening its focus on Australian growth after winning a strategically important local deal with Commonwealth Bank of Australia.
Mr Di Marco, however, said he believed TechOne would appeal to more business users due to security concerns he had about Workday's approach.
"Of all the players that we see out there competing with us I think that Workday are the only ones that seem to really get a software to services model," he said.
"I believe they have a fundamentally flawed architecture because it is multi-tenanted like us, but the data is also multi-tenanted, which means that all customers' data is in the same repository which we think is going too far and is a huge security risk."
TechOne intends to migrate all of its cloud customers on to its latest 5.0 architecture, and has also pledged to continue spending on product R&D. In its half-yearly numbers R&D spending was up 13 per cent to $21.8 million.
TNE Price at posting:
$5.39 Sentiment: Buy Disclosure: Held
(20min delay)