The Class Ltd (ASX: CL1) share price has responded strongly since it revealed its result.
Class is a cloud software provider to self-managed superannuation fund (SMSF) administrators.
Here are four reasons why I think it's a very good business:
Very high retention rates
Software businesses have made a big shift from large one-off invoices to regular annual (or more frequently) recurring revenue.
This change helps Class maintain an exceptionally high retention rate of its clients. In its FY17 result it revealed that its retention rate was 99.4%. This high retention rate speaks volumes of how useful its software is.
Increasing margins
The benefit of software means that once it's developed it can be easily distributed to new clients with very little cost. That means that most of the new revenue can flow through to the bottom line.
Very promising near-future
The government has recently changed its reporting rules, this play into Class' hands as being a cloud software provider. Lots of accountants are considering moving to cloud accounting over the next few years.
Class is the clear market-leader of cloud accounting for SMSFs and it's steadily increasing its market share. If Class can maintain its growth rates for the next two to three years then it should be a big winner in the SMSF space.
Class Portfolio
Class has also developed a product for non-SMSF portfolios, such as trusts. Trusts could be as big of an opportunity to Class as SMSFs if management can get the accountants on board. In FY17 the number of new accounts for Class portfolio grew by 78%.
Foolish takeaway
Class is currently trading at 49x FY17's earnings with a grossed-up dividend yield of 2.19%.
I think the share price is at least 5% too high to warrant a buy, but it is a strong growth business. The Class share price could suffer when AMP Limited (ASX: AMP) finally take the SMSF accounts under its control in-house.
