Innovation and path to success for technology companies

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Australian Economy

It is very well said that early investments in technology companies can yield lucrative returns. The success of technology companies is mainly dependent on their product differentiation and innovation given the rapidly changing market dynamics observed across the world including Australia. Accordingly, we believe that the technology companies in Australia which are catering to this market needs are set to grow further in the coming years. No doubt that all sectors generally get a hammering when market tumbles as also seen in year 2015 when the market was largely hit by macroeconomic factors but there were players in the technology sector such as SEEK Ltd, REA, SMS Management and Technology and Catapult that depicted stability. We also note that growth in technology sector has been lately boosted by factors such as digitisation of information, development of cloud computing services, and use of smart devices. In the last six months, S&P/ASX 200 Info Tech (INDEXASX:XIJ) has moved up 6.8% as at April 22, 2016 against 2.15% drop in S&P/ASX 200 (INDEXASX:XJO).

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Technology Sector’s Industry Movements as on April 22, 2016

 

Mark Warburton, a senior managing director at Macquarie Capital in the tech space, comments that the arrival of the cloud and SaaS businesses had allowed new software players to challenge incumbents, disrupt traditional models and accelerate their growth plans. In a separate report by MGI research, growth in Agile Monetisation Platforms (AMPs) sales in Australia, New Zealand and Oceania are seen rising to $413 million in 2020 from $88 million in 2016 (CAGR: 47.18%). AMP includes nine categories: agile billing, financials, order management, e-commerce, customer support, CPQ (Configure-Price-Quote), contract management, revenue recognition, and mediation. XERO FPO NZ (ASX: XRO) is positioning itself for the accounting Niche, which offers accounting software over the internet, against all the legacy providers of accounting software who did this via annual CD-based updates. This makes the company one of the new breed of software as a service or SaaS companies.

 

Meanwhile, based on a report by Research and Markets, global radar systems and technology market is expected to grow at a CAGR of 3.43% during the period 2016-2020. At the same time, Nearmap Ltd is set to launch its next generation HyperCamera 2 technology in second half of financial year 2016 to further enhance its customer value proposition and positioning against competitors. The first commercial imagery from the same is expected by June 30, 2016. The launch of this new innovation will lead to expanding the size of its available market and premium product will increase revenues. In its Australian business, the company has increased awareness through radio advertising campaign and added marketing automation to its online presence.

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Nearmap’s Growing revenue (Source: Company reports)

 

On the other side, given the technology boom in 1999 and 2000, a lot of companies including job search website Seek and real estate search website Realestsate.com marked their presence and drove significant earnings growth. Software businesses with global application tend to be quickly scalable and hence receive attractive valuations. SEEK Limited (ASX: SEK) is targeting the job market in Australia and is continuously launching new products in order to increase its breadth of ad opportunities. Also, it looks to promote SEEK’s candidate database solutions and refine algorithms and data analytics to improve matching of hirers with relevant candidates. Over the medium to long term, SEEK has an exciting product road map of new products and services which are foreseen to directly or indirectly contribute to revenue growth and have global applicability. Seek’s target market is also continuously growing wherein the number of online job postings in February increased across industries except labourers according to a recent report published by the Department of Employment. The government’s Internet Vacancy Index (IVI), dipped by 1.9% to 162,055 in seasonally adjusted terms in February, leaving the annual increase at 4.9%. Professional positions, up 10% to 44,763 openings, recorded the strongest growth of all groups surveyed.

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Seek’s growing performance (Source: Company reports)

 

As per the Australian real estate market, REA Group Limited (ASX: REA) is targeting the online property market and has been expanding across the international regions also other than Australia via acquisition of all the shares in iProperty Group Limited (ASX: IPP). REA Group recently revealed its strategic partnership with hipages which will allow both market-leading companies to integrate their products into enhanced consumer experiences. This partnership follows News Corp taking a 25% stake in hipages in December 2015.

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Freelancer Key marketplace highlights (Source: Company reports)

 

Moreover, freelancing has been gaining momentum as an estimated 32% of Australia’s workforce took part in the country’s freelance economy in 2015. On these lines, Freelancer Ltd (ASX: FLN) is thus enhancing its business and even completed the acquisition of Escrow.com which is a strategic step for the company. The group also added Chinese Yuan as a supported currency as well as Chinese payment gateways Alipay and UnionPay and a range of new gateways across Europe and Canada. This addition is mainly due to the fact that within 3.3 billion people currently online, 22% are from China.

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XIJ Daily Chart (Source: Thomson Reuters)

 

With the proliferating growth in technology sector, various investors in Australia now aim to have some exposure to said sector, particularly driven by IT, looking at the industry balance likely to trend towards other developed markets yielding high returns. The selection however needs to be prudently done looking at the risk diversification, company’s development cycle and capital structure, and technology specialization attributed by innovation.


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