TNE 1.31% $16.97 technology one limited

Bad news coming or unloved?, page-2

  1. 1,816 Posts.
    Acturtle

    The software industry is both good & bad.

    The good aspects are that the production of software is a one-off expense. If there is demand for the software then the business can become very profitable.

    Total sales - fixed development expense - operating expenses = gross profit.


    As i've discussed above, the development expense for a particular piece of software is rather inelastic (ie fixed). Sure, there are additional expenses in upgrading, and adding new features, however, these costs are negligible compared to the cost of developing the original software.

    The operating expenses (admin, sales, advertising, service, etc) are variable but also negligible in the wider scheme of the total costs.

    For example:

    Sales price of software per unit: $100
    Total cost of software programming/development: $4,000
    Other operating costs per unit: $10.


    If Company X is to sell 500 units in the first year of production, they'll make:

    100 x 500 - 4,000 - 10 x 500 = $500 gross profit.


    If company X were to sell 700 units in the same year, they'd make:

    100 x 700 - 4,000 - 10 x 700 = $2,300 gross profit.



    See the leverage?!

    An 40% increase in sales has led to increase in profits in excess of 400%. This is because the costs of sales and revenue are not directly related in a software business.



    This leverage has both its pros and cons. The pros are that if the company sells enough units to break even, the revenue from all aditional units sold will almost all end up on the bottom line.

    The cons are that if not enough units are sold, the loss can/will blow out significantly because of the high percentage of fixed costs.


    Another negative of the software industry is that the majority of sales are one-offs. The product (software) is not a consumable, but rather an intangible durable. There are very few recurring sales in the software industry (except for upgrades).

    This means that the sales for software companies are both very volatile and unpredictable.

    One way of ofsetting this patchy & unpredictable revenue stream is to diversify by offering value added services with the software. Examples of this include technical training, backup, etc.

    Software companies are also trying very hard to move away from the 'software sale' to the 'software leasing' business model. This leads to a annuity type income stream for the software company instead of one-off payments.


    I don't know a great deal about TNE. I do know that they're specialist software producer for the small/medium business & government segments.

    My general observations of the risks facing TNE, and thus the reasons for the very conservative pricing of TNE stock include the following:

    - What percentage of TNE's revenues are annuity stle, and what percentage are from one-off product sales?

    - Software is a discretionary expenditure item. Most sales are usually made in tandem with an IT hardware upgrade. Slow hardware sales leads to ...?

    - New competitors in any of TNE's main markets? It doesn't cost alot for some of the major US players with comparable products to TNE to come to the Aussie market & take a significant amount of market share away from TNE.

    - TNE have sold their software to businesses that were willing/reuired their software - presumably mostly in return for a one off payment. TNE will not receive much/any additional revenue from these businesses in future years... so where will the new sales come from? Don't forget - software expenditure is a discretionary item for most companies. When the times get tough, and budgets require cutting, IT will be close to the top of the list.



    ... these are just a few general points for your consideration. Please remember that my knowledge of TNE is rather limited - it's not a company i follow closely.



    All the above information is my own.
 
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