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2 accounting software companies to watch

Accounting and bookkeeping software provider Reckon (ASX: RKN) is at an interesting crossroads, rebranding its well-known Quicken and Quickbooks products to its Reckon brand, developing cloud-based applications to stay competitive, and adding new services to be more comprehensive in its business.

It holds 6.1% market share of the software publishing industry in Australia, making it number two after MYOB Holdings’ 9.8%, and generates about 20% of its total $96.7 million revenue from overseas.

Over the past 10 years, earnings per share have grown by a compounded annual rate of 22%, and since 2008 that pace has moderated to about 12.4%.  Even so, 2013 net profit margin is 18.6%, in line with past levels, and return on equity hit a new high of 40.5%, steadying rising since 2005.

The cloud is where everything seems to be going now, and existing software companies have to move in and fill up that space before too many competitors start popping up.  The company made two acquisitions for a total $2 million in October to expand its cloud presence and serviceability.

The SyncDirect acquisition offers more transfers of data from a large number of accounting systems, including cloud products, so that accountants can access data easily no matter what system the client is using. This provides service and flexibility for clients without having to change over accounting platforms and may also help to develop its Reckon One product into a cloud solution to service both businesses and accountants.

The second acquisition is an accounting reporting writer module for the Xcede brand that can be also offered as a cloud service.

Another contender trying to make a name for itself in cloud business applications is Xero (ASX: XRO). Based in New Zealand, it has just recently raised NZ$180 million in an equity issue for 9.92 million shares at NZ$18.50 per share for expanding the business internationally, especially in the UK and US.

In its half-year report released this month, it had $30.3 million in revenue, up 84% from the previous corresponding period, but announced a $17.1 million net loss.

Despite that, the market must think that this company has potential like a hot dot.com stock because its share price has gone up five times since November 2012 to about $30.62, giving it a market cap of $3.9 billion yet no profit.

Foolish takeaway

Reckon is proceeding with its share buyback program to purchase about 10% of its float, and is offering a 3.63% dividend. The future with cloud is offering opportunities, but it also brings challenges. Investors will have to keep up with the company’s reports and news to see how it is progressing.

Its past performance has to be acknowledged as very successful, but in IT and software, the business landscape can change quickly. Look for how the company specialises its applications as it expands its footprint. Businesses and professionals don’t easily or quickly change systems, but watch for robust platforms with longevity and add-on capabilities.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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