Reckon and DuluxGroup: double edition white paper report
While the growth of the technological industry is greatly impacting the share price of accounting software company Reckon, DuluxGroup is facing challenging times ahead owing to the uncertainty surrounding the housing construction market. In the first subscriber-only double edition white paper for 2014, find out whether either company is Montgomery investment grade.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Peter Davis
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I know this should be about shares but as an accountant that supports all products I really need to stick up for Reckon and dispel the ludicrous inaccuracies of some of the comments here.
@LARRY: Well I have no problems with Reckon desktop releases and neither do my clients. In fact along with MYOB v19 it is the most stable product that is around. Xero has far less features and far more bugs. Just check their bug fix report. If you are having issues as you say you are, the problem is most likely between the keyboard and the chair.
As for help, I am a partner so I speak to Sydney support. End users get the same support although there is a call centre in India as far as I know.
As a Xero Gold Partner I get direct support, but my clients get frustrated because there is no phone support, only community or email, so I end up helping, sometimes charging, sometimes not charging. Not ideal.
As for paying yearly for little return I agree there. Reckon are clearly using their cash cows to grow Reckon One and acquire other businesses. I am happy with this strategy but as an end user I would be a bit miffed.
@GRAEME ROBINSON: so where to start. Firstly Xero don’t charge for the use of Xero. True. Reckon don’t charge for the use of Reckon One. Fact. So how about we start comparing apples with apples.
As for the Reckon fee, which is a poultry $599 per year, I get free access to their 2 conferences {sorry, how much was the last Xerocon again?}, 3 licences of Reckon Accounts Hosted, all 5 desktop versions, point of sale, entire personal range, payroll premier and a dedicated support team, and over 20% discounts on product purchases which I pass on to my clients. Do I think twice about paying my fee you so obviously detest, a resounding no on that one.
To compare MYOB and Reckon to Kodak is embarrassing, for you. MYOB has released more innovative updates than Xero in the last 6 months. They are clearly on the right path. You also clearly no nothing of the Intuit and Reckon arrangement which has hampered Reckon’s efforts to join the cloud race. Please do yourself a favour and attend a Reckon event and ask the guys for the facts. I did.
Reckon One looks great, it is 7 years behind Xero in development hours, nearly 10 years behind Intuit, they have a much smaller development team, and they are only 2 years behind Xero for features and add-ons and the gap is closing quickly. With a release of a payroll module and a UK version next quarter, and very importantly the ability to sell into Intuit markets, which they have never been able to do before, I know they are on the right track.
Am I a Reckon fan, yes. Have Reckon and MYOB frustrated me over the last 5 years, yes. Are they both on track. Most definitely yes. Do I get frustrated when people post articles with little facts other than ‘I hate that company so I am going to stick it to them’, most definitely.
Regards,
Peter
Peter Davis
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Hi Larry,
Unlike yourself I love the Reckon product and switched from MYOB years ago although I support all sorts in my (now small) practice. It’s horses for courses so while I see you have issues I have experienced none of these. Again, its HFC and of course also depends on the user and skill of the installer. Maybe there were issues for some, but I certainly didn’t have any.
We did try @Xero for another business (rentals), and while it served a purpose (giving our Son and accountant full access) it could only do 60% of what I could do in Reckon, so I went back. And of course I can have 20 different entities in Reckon for the one price (currently we pay about $550 per year for 20 companies). That is a much better business model for us, but again maybe not for all.
I know the technology is a bit old now (latest update in 2008 I think) but Xero is 10 years old and looking just as tired compared to others.
For example, we have our trusts on Reckon One. That’s the product they released in 2014 so I don’t agree Jolyon that Reckon have run out of ideas. I think they were locked into their agreement with Intuit and couldn’t move.
Reckon One costs us $5 a quarter as we only turn the books on once a quarter, so $20 a year, and we turn it off when we don’t need it, yet we still get 100% access and can run reports. We couldn’t do that with Xero.
Reckon also told us we could turn it off for 7 years if we wanted, and still get access. If we then pay for a month, we can then turn it off for another 7 years and so on. Perfect and very reassuring for an old accountant like me who holds onto everything digital.
As for shares, I sold my RKN about 6 years ago for a healthy profit. However I think now they can sell into UK, US, Canada and so on with Reckon One (as they are now longer bound by Intuit) they are worth revisiting. I see they also just purchased an Intuit partner (SmartVault) so rumours of a sale look less likely I would think.
I also like the look of their EBITDA, and with many different products including APS which I used when in a large practice they can most likely sustain Reckon One development without making a loss unlike Xero. I call that smart. Maybe old fashioned, but as an investor, I want smart.
Roger Montgomery
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Thanks for sharing Peter and for taking the time to share your thoughts so eloquently.
Graeme Robinson
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I agree an attraction for Xero is the Consultants/Bookkeepers/Accountants get a Commission every month for each customer they sign up. This is an attraction to recommend Xero over the other programs and it also tends to keep the Customers more aligned with you, as we are billing (and dealing with) our Customers each month.
As a partner with Xero we also get all the software free, including Accountants getting their Tax Software free. With MYOB and Reckon(?) you have to pay a considerable amount of money for this.
If we go back to the enormous increase in Customers MYOB/Reckon got when the GST was introduced, MYOB got the majority of new Customers as they got the Accountants onside, to recommend the software. My experience was I would have about five inquiries for MYOB to one for Reckon – even though I thought Reckon was the better product.
The point is Xero is getting their Partners onside to recommend their product and thus, I see, doing what MYOB did back in 2000. I suggest this marketing by Xero is the reason they doubled their Customer base in the last 12 months.
Going forward as they now sell the software, that complies with the Countries Tax Laws in NZ, Aust, USA and the UK (that I know of), I see they will ultimately have a lot larger Customer base and thus be able to spend more on R&D. They have already shown they are very progressive in improving their product, and ultimately these R&D costs, per customer, will only decrease and make them harder to compete against.
It seems to me Xero is setting the benchmark and MYOB and Reckon are just trying to catch up.
Interesting times.
Nick Buckley
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Reckon may still have a lot going for it and current market sentiment offers a chance to explore the business in detail. In the short term, management noted that de-stocking and moving to a subscription model have reduced revenues (as upfront payments decline) but should increase earnings going forward and clearly competition has increased with the addition of Intuit and continuation of MYOB and Xero.
It’s cloud platform, Reckon One has just been released and is going to be further developed inline with customer feedback (although it appears still too basic to compete with Xero if nothing else changes), it offers important advantages – the key two are that it has a modular approach, meaning from $5/month customers can have an account and add and remove modules as they need them throughout the year (i.e. Business Activity Statement reporting and lodgement occurs automatically through ReckonOne’s GovConnect module, which customers would usually only require prior to their reporting period and not want to pay for it in other periods). In contrast, Xero charges $25/mo for their most basic offering, up to $80/mo.
The other key benefit to small businesses is the integration of Reckon Pay – an inbuilt app that will allow mobile billing to occur “in the field” and be sent directly to the cloud platform. NAB reportedly think Reckon have a strong position in Cloud software going forward and partnered with them and Verifone (who produce the mobile payments cradle). Customers like builders/plumbers, small fashion retailers or mobile coffee shops could use this technology and instantly receive payments, supply invoices (email), send quotes and see which products have been purchased and therefore which are popular/need restocking – this is far less simple with cash based mobile services.
RKN are also expanding into the UK and SE Asia. The balance sheet is strong and Reckon have invested heavily in their cloud offering, whilst also offering established hosted and desktop products (neither MYOB or Xero offer all three).
Reckon’s repurchase of shares seems prudent if they believe the stock is undervalued.
Although there are still key risks re. competition and uptake/development of their products, Reckon seems to understand that the accounting/document management software environment has changed and will only get more demanding. Xero appears to be the current benchmark in terms of cloud based software but its popularity may be being unduly influenced by the commissions and free software accountants currently receive for bringing in clients – in the long run this won’t be sustainable but in the short term is eating into incumbent market share (it’s a cleaver idea). Further to this, RKN is more than just cloud accounting software.
RKN’s share price will do in the short term is anyones guess, but I think if Reckon can defend or increase market share in FY14 forward, the business will be in a strong position for the long term. To my mind the key risks are not insignificant – particularly increased competition and the current need to quickly update Reckon One in line with feedback will be major issues for Reckon this year.
Full disclosure: I own shares in RKN.
Roger Montgomery
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Thanks for sharing your view Nick. I am aware of other investors who hold a significantly more bearish and negative view. And that is what makes a market.
zoran arnautovic
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Hi Roger/RKN
Buying back shares to raise EPS is a No,No
Bonus depends on rising EPS.
It’s quite clear now the rain is gone.
Cheers
Nick Buckley
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I agree it does Roger. It’s going to be an important year and if their cloud offering doesn’t do well, it may turn into quite a mediocre business with little to make it stand out from Xero who customer base continues to grow rapidly. MYOB have since launched a similar service to Reckon Pay and their cloud offering will have a lot of R&D behind it. Reckon’s R&D is tiny. I can understand the bearish consensus. I certainly don’t advocate a buy based on what I’ve said. To my mind there is still a small but solid probability they will do well, but an ever increasing one that they are going to struggle for the next few years. Again I’m not advocating a buy and still have a lot to learn myself.
zoran arnautovic
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Hi Roger / RKN
Reading financials and seeing that taking on debt to buy back shares and therefore increasing EPS.Looks like bonuses are tied to EPS, does’t smell too good
Cheers
Amanda Cook
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Such an interesting article Roger. I especially appreciated reading all the comments too. I have been thinking about getting out of Reckon for months will now just do it! Many thanks
Jolyon Parslow
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In answer to the comment as to whether personal experience can be used to judge a company for investment, I think customers particularly in retail or internet businesses who observe systematically are often quicker to notice strategic weaknesses long before the analysts who look only at the figures and what management says. While I would not base any analysis on one bad customer experience, astute observation over time can say a lot when deciding on businesses such as JBH v DJ’s or Myer. So with Reckon and Zero.
Reckon is tempting on paper due to good current returns and may be a rational investment for a few years but, I say, beware! In my view it has reached its peak. They show no sign of having the management quality of say Flight Centre which coped with the challenge of transition to a blended part-interent model.
As a long time user of MYOB since inception, and Quicken/Reckon (at times both at once as I had multiple entities), I feel both companies but particularly Quicken/Reckon have become far too complacent, and now fail to offer value, have not got properly on board with Mac, tablet and smart phone versions despite obvious shifts in the marketplace, have poorly developed and expensive cloud add-ons like backup, and in the end have created a reservoir of ill-will with a poor service and value proposition.
The Quicken (then rebranded as Reckon) product I have just stopped using required annual updates at increasing cost because of minor tax and regulatory changes, but the value to the customer in terms of the product features had not improved since 2002, except in cosmetic ways. These were changes for changes sake to justify higher prices, often useless add-ons not integrated with the program (like frequent flyer point record systems or poorly designed asset registers). These could change or be dropped without warning rendering the previous database useless, as could even core accounting data file structures, thus rendering years of backups and archives useless. When I came to change out of Reckon, the final straw was that unlike competitors, the program file structure prevented data export without tedious account by account CSV file exports.
Once management show a bad ‘monopolistic’ attitude to retail customers a business is doomed to mediocre or nil growth and ordinary ROE, even though (e.g. as say with Telstra v iiNet) it may take decades to fully show due to customer stickiness and costs of changing. In my view look for something better. Zero IS a big risk, but Intuit (US) and Reckon Australia don’t get it and are likely to become the Telstra’s of the legacy accounting world. If you have access to growing businesses, create a vibrant marketplace of developers/partners, and you can have add-ons to the core, you can create whole new segments–even industries as Real Estate.com, Apple, Google and Amazon have done. The long term value of capturing a significant slice of all businesses around the WORLD is huge IF executed well.
Roger Montgomery
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Thank you for taking the time to write that excellent contribution.
Graeme Robinson
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Xero stated in it’s annual report that their aim is to be number one in the world for Cloud Based Accounting software. This, they expect, will take them years to achieve and cost an enormous amount of money. Thus they do not expect to make any profit for years to come!
I really liked the company when they were $5, but could justify them at that high price, when they weren’t making any money!!!!
Oh that’s one that got away.
Graeme Robinson
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As a long term user of MYOB, Quicken an Xero I can only say I feel the first two programs are taking the same line as Kodak, in that digital photography will never take off!
Xero main plus is that they offer open source to other programmers allowing seamlessly integration of their software with Xero. I believe there is now over 300 software programs that integrate this way.
The days of using MYOB/Quicken and Excel to manually integrate software is in the last century.
Xero is a very basic Accounting program, unlike the other two, leaving the specialist areas to other software programs.
Robert Green
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Hi Roger
I have used Quicken products for about 15 years, so I have been a more or less rusted on customer. Eventually the time came when Quicken couldn’t handle a 64 bit operating system so I needed to upgrade to a later program. All I needed was a replacement for Quicken Cashbook 2003, but Reckon no longer provide that sort of simple accounting software.
There was no rush so over 2 years I sent about 4 emails to the company to see what was the closest equivalent, but unfortunately there was no reply from the company to any of the emails.
In the end I bought Cashflow Manager from a competitor and am happy with the new product. Is personal experience relevant when making investment decisions?
michael white
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To Roger,
Its amazing how such a detailed report when released to the marketplace has an affect on its price. RECKON rose 1.44 percent and there was an increase in volume. Roger your influence can be seen as people look for value in a expensive market place.
Likewise Roger I would like to know your thoughts on ARB corporation as another analyst has lead me to believe it is a good small cap. As a member of the fund it is good to see your comments in 2014 again
Peter Flaherty
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HI Roger Just wanted to thank you for your articles, and all the team, between using Skaffold and the information I get from you I have been learning at an exponential rate. Your articles are always in a language that is easy to understand and has assisted me greatly in my investment process.
Many Thanks – Peter Flaherty
Larry
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Reckon – It’s hard for me to evaluate a company when I personally loathe the product. From the ground floor, they have a product which is not highly regarded by its users. All the help is off-shore, sometimes helpful, other times not. Every time they release a new version there are many, many errors which all result in user frustration and many times in phone rage. Rage also comes from the fact that when they release a product, the user is expected to find the errors and spend many hours on the phone trying to get a solution which may or may not become available, and also has the privilege of paying
$700.00 for an update (!) in Australia. Apparently MYOB is the same, as they expect users to find their mistakes as well. I have found very few accountants who prefer Reckon. With technology expanding the way it is, it’s seems impossible to keep up, and there are a lot of people who would rather do things the old-fashioned way. If there is an accountancy product for small business released on the market which reverts back to core values and no headaches except the ones caused by employee errors, I for one would be overjoyed, as would all those who still use spreadsheets. It’s a sad fact that businesses put all their effort into ripping off the customer to get a nice looking balance sheet.