The Reckon Limited (ASX: RKN) share price closed effectively flat yesterday after the company released its half year results for 2017.
- Revenue grew 3% to $50 million
- Net profit after tax fell 11% to $5.5 million
- Earnings per share of 4.9 cents
- Document management business divested as a dividend to shareholders
- Increasing migration to cloud
- Growing user numbers and strong subscription revenue growth
- Outlook for continuing growth via migration to cloud, large market opportunity
Reckon posted an interesting slide in their presentation here, showing the degree to which the accounting software market is still desktop-based:
Being an unrelenting XERO FPO NZX (ASX: XRO) bull I couldn't help but think of that company (a Reckon competitor) when I saw this slide. However, Reckon also has a meaningful market opportunity with its Reckon One cloud product, and is both much smaller and more conservatively priced (both its shares and its product) than its larger competitors. For example, here is a quick sample of pricing for accounting software products (from company websites):
- Reckon One – from $5/month
- Myob Essentials – from $25/month
- Xero – from $25/month
However, pricing moves up very quickly as you add more features, and for more advanced features including payroll the pricing is more like:
- Reckon One – $20/month
- Myob Essentials – $40/month
- Xero – north of $60/month and up to $100+ for 100 user payrolls
This is not an apples with apples comparison but is a useful example of how the companies are targeting different niches. Reckon is financially appealing to small businesses in a way that Xero or Myob may not be. Time savings at a low cost is a win-win for sole operators.
Reckon is priced at just 15x earnings which could prove very cheap if the company is able to transition its customers to the cloud (66% are non-cloud) and achieve higher-margin sales growth. However, at least one Australian fund manager recently sold their shares in Reckon, stating that they thought the core business was under assault at the same time as some of the value (in the form of the document management business) was removed.
Reckon has a weaker balance sheet with minimal cash and a lot of debt, which could make it hard for the company to invest in marketing to compete with its Australian competitors and Intuit. As a result, Reckon could be one for the watch-list, instead of the portfolio.
