Ready, tech, go - finding value in the SaaS carnage

We have watched with interest for several months as AI has wreaked havoc on anything software related. It’s been a global phenomenon with some of Australia’s biggest and best technology companies trading more than 50-75% off their highs in less than 12 months. Holders of listed software stocks are in immense pain, making it an area we think is worth digging into.

It is true that a good portion of this sell off is warranted. When many tech stocks traded on multiples of 50x revenue (some even higher), any threat or uncertainty around their perceived annuity like earnings expectations did deserve a material re-pricing lower. And this is what has occurred as investors reevaluated their future expected earnings streams.

We’ve seen many stocks trading on 50x now trade closer to 10-20x. And in more recent weeks as the fear reached fever pitch already undervalued, typically smaller technology companies have gone from trading on 3-4x to 1-2x. Though the pain at a share price level is all the same.

However, the economic implications are very different. To buy a stock on 20x revenue you still need to have a high level of conviction in its future growth, and therefore a firm view on the impact of AI.

To buy the same business on 1-2x revenue, the primary focus turns to the resilience of that revenue, and the ability to generate a satisfactory level of cash flows, such that you may have all your money paid back in a relatively short period. It is a very different investment thesis and underwriting of risk.

It is also true that markets have indiscriminately sold off all listed software stocks, but there will certainly be winners amongst the bunch.

We don’t profess to know exactly how AI will impact the world or tech stocks generally. We don’t think anyone does, which is partly why the share price declines have been so precipitous.

However, based on the work we’ve done to date, we do have enough conviction to say with a high level of confidence that there is some incredible value emerging in technology stocks. Public market SaaS may well be the best risk-reward set up in markets today.

The first we’ve made the plunge into buying is ReadyTech (ASX:RDY).

ReadyTech – HR, Education and Local Government Software

RDY, led by founder-CEO Marc Washbourne, is a provider of Vertical Market Software (VMS) including HR, payroll, student management systems and a full ERP solution for local governments.

Listed in 2019 at $1.50/share, RDY’s public market experience has been tough. While it reached a high of $4/share in 2021/22, it has consistently missed its own medium-term targets and grown slower than it told the market it would. It’s made several acquisitions, some very good and some less so.

But the business has still grown, both organically and by acquisition. From 2016 to today, revenue has increased from $23.8m to $120m while Cash EBITDA has lagged, increasing from $9m to $15-$20m.

The below highlights revenue growth over this period, broken down by organic and inorganic.

The current market cap of $140m doesn’t reflect the scale of the business either. RDY services 5,000+ customers, has annual recurring revenue (ARR) of >$100m, ~500 staff and offices in NSW, Victoria, Tasmania, Perth, New Zealand and the UK.

The best thing about a completely battered share price is that it can factor in a lot of bad news. That leaves room for things to go better than the market expects.

“Look down, not up, when making your initial investment decision. If you don't lose money, most of the remaining alternatives are good ones.”
– Joel Greenblatt

RDY’s strategy is to focus on specific industries – Hotels, Hospitality, Retail, Education, Agriculture and Local Government - with software that’s heavily customised to the specifics of those businesses. It is a well proven model, which larger Aussie peer Technology One (TNE) has demonstrated works at scale.

Target customers for RDY have 50-5000 staff and operate in industries with complex labour laws and regulatory requirements. Within these verticals RDY has 13-23% market share, showing good penetration, with dominant positions in some niches.

It is deeply embedded in some of the largest organisations in Australia, for example Accor where it services roughly 40% of their ANZ franchise hotels with its Workforce solution.

The functionality of RDY’s software is mission critical and engrained in the operations of their clients – onboarding, rostering, time & attendance, payroll, leave management – meaning that once in, the products are incredibly sticky and tend to benefit from the growth of those businesses and their underlying industries.

Those industries (hospitality, travel, agriculture, retail, etc) appear fairly AI-resistant, reducing the risk of reduction in seats under the typical SaaS revenue model, as much of the market currently fears (although remains unproven). This is not a business predominantly servicing the software industry, or white-collar jobs more generally.

Gross retention is >90% and net retention is >100%. That’s great, but means their competitors are sticky too, making it hard to displace them and grow at a rate the public market often wants to see. The sales cycles for their products, particularly in Enterprise, can also be very long.

That combined with recently removing its medium-term revenue targets, an approach to market messaging that rarely works in our view, has left the stock completely unloved.

It’s worth noting that the Readytech of today is the culmination of a long list of acquisitions over a decade. We think the company is best viewed as a broad portfolio of software businesses split into their three chosen categories, the sum-of-the-parts of which is worth considerably more than today’s share price, with portfolio optimisation a potential catalyst to help realise that value.

Despite having traits that should warrant an above average multiple for software stocks (high retention, high gross margins, vertical software), RDY trades at roughly half the median ASX technology revenue multiple of ~3x, at just 1.4x today.

Workforce – The Crown Jewel

The Workforce business has been a steady grower and reflects the high retention, critical nature of the software. The new flagship Ready Workforce product has been growing at 24% per annum, but this growth was masked in 1H26 by some churn in the smaller Managed Payroll business, a service where companies outsource the payroll function to RDY which uses its internal software to run it.

The value of the Workforce business is driven in large part by the incredibly sticky nature of the offering. Australia has some of the most complex labour compliance regimes in the world due to modern awards, enterprise bargaining agreements, Fair Work Act compliance, penalty rates, overtime, casual/part-time/full time entitlements and Single Touch Payroll.

It is a space that has attracted significant PE interest over the years, including KKR, The Access Group, Pemba (RDY’s largest holder), Vista, Pacific Equity Partners (which lobbed a $4.50 bid for RDY in 2022) and many others.

The Workforce business services the most complex industries exposed to the above regulations and has built a strong reputation for doing so. We think this segment, which generates around $40m annual revenue, is worth close to the entire Enterprise Value of $200m today, making Workforce the crown jewel.

There have been multiple transactions in the HR space of 4-5x revenue supporting this assumption, which we’ll touch on later.

Education – Core to the Enterprise Shift

Education has been an intense focus for growth and a market where RDY has historically been dominant in the RTO and vocational space.

Their foundation product is a Student Management System (SMS), a complex piece of software that education providers use to manage the entire student lifecycle process while also providing compulsory reporting of student data to the government under a reporting standard called AVETMISS. The government requires all vocational training organisations to use an accredited SMS.

The SMS is a mission critical piece of software for education providers where errors are unacceptable. There’s no better example of this than the debacle with TAFE NSW using a system from a UK company called Tribal.

In 2016, Tribal’s SMS solution, installed at TAFE NSW, lost track of $138m in student fees, requiring TAFE NSW to spend $10m on accountants tracking down the lost funds.

TAFE NSW terminated Tribal, and yet the time and resources taken to implement a new system have been so immense that a decade later Tribal is still being used by TAFE NSW, with the end anticipated in the next year or so.

TAFE NSW spent $90m with DXC implementing and customising an Oracle SMS to replace Tribal, and then took the project in-house due to delays and cost overruns.

This story encapsulates the RDY investment thesis and the economics of their push into the Enterprise, which is worth keeping in mind when we touch on the cost base and pipeline in a moment.

RDY have other solutions like a Learning Management System (LMS – which they’ve successfully bundled with SMS and sold to many clients) and niche solutions like their Smart Funding product, which processes and approves funding for government training initiatives.

RDY is dominant in the RTO sector with their VETTrak and Job Ready products. The strategy for the last several years has been to build out their Ready Student product, and the Company’s reputation, for servicing the Higher Education market and large TAFE’s as they push into Enterprise. Higher Education is an area where Tech One are strong, while others like Tribal are effectively exiting the Australian market.

RDY had their big break in the Enterprise Education space with their win of Bendigo Kangan Institute (BKI) in Victoria in 2020. BKI comprises nine TAFE campuses in Victoria, delivers more than 200 courses and operates multiple training facilities. It is the largest TAFE organisation in Victoria, and RDY now service the Top 3 in the graphic below.

Winning the contract to supply BKI with their Ready Student product (then called JR Plus) was both a huge milestone and a learning experience, as it served to help build out expanded functionality into Ready Student that now leaves the company able to leverage that success into other wins, particularly in TAFE.

Our feedback and channel checks suggest the experience for BKI with RDY has been positive, and the product is well received. It took several years, tens of millions of dollars and a very large team on both BKI and RDY to implement, hinting at the scale of the contract. Their success at BKI led to winning Melbourne Polytechnic and Chisholm Institute.

It is public knowledge that the group of 12 VIC TAFE’s are being tendered in Victoria, including this BKI contract. The decision has been made to bring them all onto the one system, with the likely structure to be a Preferred Provider with each TAFE then allowed to negotiate terms. RDY is well in the mix.

We think they have a better than even chance of winning it based on feedback we’ve received on BKI’s experience, and the fact that they already service the three largest TAFEs in Victoria. The total size of the potential contracts would be in the tens of millions (including service fees and delivered over the medium term) but more importantly it would help validate their Enterprise strategy in Education.

RDY is supporting an elevated cost base in anticipation of winning contracts like this, which has reduced cash margins from 25-30% in prior years down to 10-15% today. This is, in our view, a short-term strategy that the market is pricing as permanent.

In the event they lost the smaller BKI contract, it would take years for the replacement to come in and RDY to be removed (recall the Tribal example at TAFE NSW), allowing the growth of the rest of the business to offset the churn.

Zoom out and you’ll notice the Education business has been a steady grower, albeit slower than in years prior until we see further evidence of Enterprise success. Talk to customers and industry insiders and you’ll realise they’re one of the dominant providers, particularly in RTO and VET, with many customers noting the software is a core part of what they do, and has been well received at BKI.

Government and Justice – Cloud Migration Story

The Government business, which services approximately 200 of the 530 councils in Australia, provides software that allows Local Government clients to run their entire operations.

In this space RDY compete with the likes of TNE (again), Civica (PE owned), Magic, Infor and others. It has been a rather sleepy market for some time, one of the last sectors to fully shift to the cloud, but it is happening.

Currently, much of the client base is on legacy product and paying only maintenance fees, having paid the upfront licence fee under the prior model many years ago.

This is what underlies the economics of a 2-2.5x increase in ARR as clients migrate to Ready Community, the new cloud offering.

The councils net spend often reduces as they no longer need expensive on-site infrastructure and additional personnel.

That migration process will no doubt be slow. But it is underway and there’s been some early wins. The entire market will eventually shift from on-prem to cloud, and it’s up to RDY to take their share.

TNE are of course a big player in the space, though our understanding is they tend to be pricier and target the largest councils. Civica, which has just under 100 councils, will be decommissioning their local government product soon, so those clients will have to go somewhere.

One of the other trends in Local Government has been the change in perception of rate payers to customers. Those customers are now demanding a better experience and level of engagement with their councils, and councils have had to start purchasing a CRM solution as a result. Cloud offerings have become more in demand as work from home has become more popular. Many of the players in this space have had to respond, RDY included.

The Justice business, which is grouped with Government in the accounts, is smaller but looks well entrenched with clients in the Courts and Legal systems. It is sticky revenue, but a modest grower, and we think it’s likely quite profitable.

It is worth noting that the Local Government business generated 35-40% EBITDA margins when it was first acquired.

Enterprise Focus – First Way to Win

We touched on this earlier but its significance to the RDY thesis is such that is bears repeating. For the last several years RDY has been undergoing a shift towards the Enterprise, particularly in Education, as they go after more TAFEs and universities.

Some of this has been driven by the more attractive economics at the enterprise level, while another factor is that they’d simply become so dominant at the SME end that going upscale was required for continued strong growth.

Their win of BKI in 2020 was demonstrative of their ability to win these bigger deals and helped get the product ready to bid on new work. However, the missed revenue targets and the inevitable delays to sales decisions have clearly battered the confidence of public market investors and left the share price in the doldrums.

To be able to win in Enterprise, RDY have had to undergo a substantial investment in both R&D and sales & support. You can see this in their declining cash margins, despite revenue growing every year.

The business is now fully costed for several large deals in the pipeline that management expect to win. They hinted at the half year that their conviction had grown, and their win rate remains strong, with delays being the primary issue.

If those deals drop, the top line will grow and the cost base should remain flat, leading to accelerating earnings growth.

But just as important is that any big wins will validate the Enterprise shift, which the market seems to be pricing as a failure thus far, and warrant a re-rate.

The R&D spend alone has been immense. Over the last four years, $120m of development spend, roughly $60m of which is considered ‘Growth R&D’ focused on:

1) Upgrading Ready Student and the Education offering to service enterprise scale deals such as universities and TAFE’s (we think this is roughly half the total R&D),

2) Completing Ready Workforce’s end-to-end cloud-based payroll, HR and workforce management solution, and

3) Integrating the acquired Ready Community products to complete the Local Government offering and migrate legacy clients onto their new cloud offering.

From a starting point of 1.4x EV/Revenue and 10x EV/Cash EBITDA even at compressed margins, we don’t think we need many new contract wins for the stock to do well.

Importantly, we think there are two other ways we can win from here.

PEMBA and Private Equity

RDY’s largest shareholder is a well-regarded private equity firm called Pemba Capital Partners with 32% ownership. Pemba first acquired RDY in 2016, took it public in 2019 and sold a business called Open Office (part of the Government division) into RDY in 2021.

Given the typical 10-year life of a PE fund there has been some speculation around Pemba’s intentions for their RDY holding this year. The structuring of their funds and their own intentions are known only to Pemba, but it is worth noting.

In 2022, RDY received an offer of $4.50/share from Pacific Equity Partners (PEP), one of Australia’s leading PE firms. The offer implied an EV/Revenue multiple of 8x, and a lofty EBITDA multiple.

RDY’s second largest shareholder, Microequities Asset Management, publicly took a stand against the $4.50 bid stating they would vote against it. With 13% at the time (now 15%), Microequities owned enough to block any bid.

We really respect the team at Microequities, and everything is easy in hindsight, but that bid now seems a long way away from the current $1.20 share price.

But that’s where the significant opportunity may exist.

$4.50 today, while an enormous premium to the last traded price, would represent 5x EV/Revenue - well in the ballpark of where several other similar transactions have been completed, particularly in HR tech. Noting of course that each of RDY’s businesses likely deserve different multiples.

It may seem unrealistic when considered through the lens of the market’s current pricing, but we do view a bid at $4+ as achievable in the near to medium term, mainly if the Enterprise strategy kicks into gear.

Even if you don’t believe a bid near $4.50 is possible, there’s enormous room between current prices and the underlying value of RDY in a takeover event, and we think the odds of corporate activity have increased significantly.

One sign of this is the recent appointment of Bryce Thompson as CFO in October 2025. Bryce is an ex-investment banker focused on the technology sector and was well known to the ReadyTech team. We think he knows the underlying value of this business is significantly higher than the current price and can help realise it when the time is right.

Since Bryce joined the share price has halved, driven by a combination of the removal of long-term revenue targets (which we think is the right decision) and the AI driven sell-off of software stocks intensifying. This has probably increased the odds that potential buyers are circling, either for all or parts of the company.

At current prices the company is almost certain to garner PE interest, but Pemba’s large position also acts as a blocking stake preventing hostile bidders. Ultimately, they decide RDY’s destiny.

So, what are Pemba’s intentions?

We can only speculate. Our understanding is RDY was part of a Pemba fund that has performed well, so their investors probably aren’t pressuring them to sell their stake. But it’s also possible their fund structure has holdbacks on performance fees until all positions are realised, which may create an incentive to sell.

One thing we can be certain of is Pemba know it is cheap and won’t sell for anything close to current prices. But they are a private equity firm at the end of the day, and so a sale at some point is inevitable.

It’s also very possible that Pemba is fully invested in seeing RDY’s Enterprise strategy right through to the finish line. It is low odds but not impossible that Pemba take advantage of the frustrated shareholder base to acquire the rest of RDY.

All the above is speculation. We only know that RDY is significantly undervalued vs peers, and there are many logical buyers including several PE firms and even strategic players like Technology One (ASX:TNE).

Corporate activity doesn't have to be for all of the company either. Divestments would also make a lot of sense and RDY has plenty of options worth considering.

For example, selling Workforce on 4-5x revenue might cover the entire EV today and make the current price look cheap. Shareholders from current levels would do very well, but that would mean selling the crown jewel and leave the leftover business smaller and less compelling to the public market. This would make more sense if there was an intention to sell the remaining businesses too.

Selling Justice, which is small and profitable, but less core from our perspective, could make sense. As would divesting individual businesses from any of the other core segments, if they no longer fit RDY’s strategy and return profile.

Divestments would fund debt repayments and/or buybacks and could help validate the value of the rest of the business, helping re-rate the stock. Selling lower margin or loss making businesses may also help normalise RDY's cash margins faster.

We think the company is likely considering all options.

Third Way to Win – Cost Outs and AI

There’s a third way we think RDY shareholders can win from here, and that’s from a margin normalisation process, which is likely accelerated if 1) the Enterprise strategy did not work over  and the company cut the cost base aggressively, or 2) divestments of lower margin or unprofitable businesses occur.

RDY’s Cash EBITDA margins are relatively low (low-mid teens this year) due to the cost input required to support a pipeline of Enterprise opportunities that have not yet dropped. The business is now fully costed for a significantly higher revenue run-rate on the assumption big wins are coming.

If the pipeline converts the way management expect, then the stock is set for a re-rate as costs will stay flat as revenue grows. If for some reason it does not, then there will likely be a cost restructuring of some sort down the track, eventually returning RDY to its historic margins.

VMS businesses regularly run at 25-30% cash margins, particularly a $100m+ ARR business like RDY. In fact, prior to the Enterprise push, RDY was running at 20-30% margins despite being much smaller.

The timing for this opportunity could not be better given developments in AI. The same driver of the multiple compression for all SaaS stocks is also creating an ability to restructure your technology costs for the new world.

We’ve seen several of these in the media lately, notably WiseTech, Meta and Block, but the same principles apply for smaller technology companies too. Another of our portfolio companies in Praemium (ASX:PPS) announced they were reducing their technology costs by ~30% in one go. We don’t expect this from RDY, but we think they’ll be a significant beneficiary of margin expansion from AI over time, and do have the ability to accelerate it if they wished.

If RDY could generate 30% margins, then it is trading on 5x EV/Cash EBITDA. The cash generation would quickly move the balance sheet from net debt (currently $42m) to net cash and allow buybacks, dividends or potentially a restart of their M&A strategy.

If we envision a day where RDY were to announce they were moving to 30% cash margins from cost outs, we think it could quickly trade at 10x EBITDA (~$2.50/share).

The beauty of RDY’s business is its resilient revenues and sticky clients, and the cost base of today reflects a business in growth mode, rather than one optimised for cash generation.

In summary, we see three ways to win from here:

1) Enterprise success drives revenue acceleration, scaling earnings and a share price re-rate,

2) Corporate activity, all or parts, at a significant premium to today’s implied price, or

3) Action taken to normalise cash margins closer to industry peers, either through AI or divestments of lower margin businesses, or both.

How Do We Lose?

Any good thesis considers the potential for loss. No investment is risk free and that includes RDY, despite our conviction that it’s worth far more than the current price.

What could go wrong?

One way we could lose from here is that our assumption RDY can earn 30% Cash EBITDA margins is simply wrong. Perhaps there is something fundamentally different about this business compared to other VMS providers, or something shifted since the pre-2022 days. We’ve done extensive work in this space and think this risk is very low, but if we were wrong it would mean our estimate of value is lower, so it is worth considering.

Another is that clients aren’t as sticky as we think they are. Retention rates for RDY have been strong since listing, but what matters is the future.

What we did to build comfort here was talk to a long list of clients and collate feedback industry insiders, across each division. The consistent factor was that RDY's products are deeply integrated into client operations, and there was hesitance to remove them unless absolutely necessary.

Worth noting that the clients we spoke to were randomly chosen, we didn't get a list from RDY management, avoiding bias.

And then there is the elephant in the room. What if AI does replace system-of-record type software vendors like RDY?

In the scenario that companies can code their own applications, and start-ups can quickly launch and compete with incumbents, then obviously this would negatively impact RDY and peers. At best it would put pressure on pricing, reducing their ability to lift prices over time and pushing down margins. At worst, it renders them obsolete.

But our current view is that this simply won’t happen. And if it does, it won’t be on any near-term time span.

It’s not just the technology capability that matters, but also the risk tolerance and acceptance of the customers. RDY services large, complex, often slow-moving organisations that provide a critical service to their own clients. Much of their software serves to comply with complex regulatory requirements such as employment legislation and reporting requirements, and businesses that fail to comply can be hit with hefty penalties - financial, legal and reputational.

The dramatic sell-off in software stocks is interesting to us because it has priced in a potential revenue impact but not priced in any of the cost benefit from AI, nor the possibility incumbents may be better placed than many expect. The revenue impact is possible, no doubt, but it is a potential impact in the future. The cost out opportunity, or the ability to keep costs flat and expand margins, is real today.

What is ReadyTech Worth?

We think RDY is clearly a takeover target. So, using a collection of recent transaction multiples for similar businesses is reasonable.

The median from the group above is 4.55x. All transactions in the table have occurred in the last 3 years.

ASX listed SaaS companies with solid retention have broadly traded for between 3-5x EV/Revenue. Vertical SaaS has continued to attract a better multiple than horizontal peers, and so too have the listed VMS players held up better than horizontal SaaS on public markets.

Segmenting it further, the key factors driving the appropriate revenue multiple are size, growth rate, retention, margins and the pool of potential buyers.

On size, with $100m+ of ARR, RDY rates well. Note multiples of 2-3x are typically reserved for smaller transactions (<$50m) or those with higher churn.

Organic growth rates up to 2025 were reasonable. For each division they come to 10% (HR), 12.8% (Education) and 6% (Local Government). The slower growth of 4-5% in 1H26 may temper this, though it’s generally unwise to focus too much on any one period.

Net revenue retention is consistently the most influential single metric in SaaS M&A valuation, and retention is where RDY is strong. Gross retention is 90%+ and net is 100%+. It’s worth noting that RDY has a broad portfolio of products and both growth rates and retention (and product-level profitability) would vary, but at a portfolio level retention remains strong.

Gross margins are the typical high SaaS margins. EBITDA margins have been pulled down by the Enterprise strategy discussed in this article.

A huge driver of transaction multiples is the pool of potential buyers, for which there have been many in HR software, both PE-backed and strategics. Even the way the process is run can be important, and with Pemba (assuming they are a seller not a buyer) and CFO Bryce there, we have confidence this will be handled well.

Valuation is about a range of potential outcomes more than an exact science. Our estimate of value, based on RDY’s current performance and a review of transaction multiples, comes to $2.50-$4.50/share, or 100-275% upside.

Thesis Summary

RDY’s business, as a provider of sticky vertical SaaS with solid market share in its target markets, is a far better one than the current price implies. The completely unloved share price, off -75% from highs, reflects historical missed revenue targets and a violent sell off in listed software, and is now significantly dislocated vs underlying value.

We assess that value at between $2.50-$4.50, representing 120-300% upside from current prices of $1.10, and see three potential paths to near-medium term value realisation being:

1) RDY’s optimism of pipeline conversion is proven warranted with new wins, including the potentially lucrative TAFE VIC deal, driving increased revenue growth, accelerated earnings and validation of the Enterprise strategy;

2) High chance of corporate activity with a full or partial sale;

3) Margin normalisation through AI-driven cost controls and/or divestments, significantly increasing cash generation.

We close this note with one caveat. We have high conviction that RDY is worth considerably more than the current price, and that this value will be realised one day. However, we do not know when that will occur. A bid or PE interest rumoured in the AFR’s Street Talk column could emerge tomorrow at a big premium and we would not be surprised at all, but equally it could take two years.

We have positioned our Fund accordingly.