At our March Pro member event, Motley Fool Pro lead Advisor Matt Joass got a chance to sit down with Class (ASX:CL1) CEO Kevin Bungard.
Tune in to the video below to hear Kevin’s answers to Pro members most burning questions, like:
- Why do so many customers choose Class over it’s competitors?
- What is ‘cloud’ software, and why does it matter?
- How much can Class keep growing?
To kick things off, I’d be keen to hear a little bit about your history with the company, and kind of how Class got started.
Sure, okay, I think like a lot of these sort of new ideas,it sort of started over a glass of red.
The founders of the business were, well one of the key founders was a fellow named Andrew Blau, who’s on the board of AMP’s SMSF business now.
At the time, he was running a business called Smart Super, and they had about 1,000 self-managed super funds that they were administering, and they were really struggling to get scale, and they wanted to go from 1,000 funds to 10,000 funds, so they were sort of basically spit-balling, what can we do?
How do we do this?
How do we scale the business?
How do we make self-managed super fund administration something that can scale and not be dependent on having highly-skilled accountants doing what was effectively mundane work? So that was really kind of the genesis of the idea.
They looked at what was involved and basically came up with the idea of saying, “Well, we need to actually automate a lot of the accounting so that we can focus on the strategy and focus on the exceptions around admin, but have all the accounting just be done.”
And that’s kind of one of those things where it’s, I think, when they started off, their original budget was 12 months and a million dollars, and they could build it, and I think that was in 2005.
The product launched to the market in 2009.
Right, took a few years. And cost a lot more than a million dollars by then. I first got involved end of 2007. I came into sort of help with some requirements.
My background was big super, so APRA funds and consulting in that space, and I joined in 2008, and I came on board basically to kind of take them from what was effectively a research project to let’s turn this into a business, how do we take this into market.
And we launched the product to market in February 2009.
And how have been those years since, between 2009 and the IPO? What was that journey like?
Well, I think starting a business in 2009, just off the back of the GFC, was a bit of a challenge. We’d just asked all of our founding investors for a whole bunch of money, and then throughout that first few years, there were a few capital raises, and asking people to crystallise their losses in the middle of the GFC and sort of pony up more money to keep the business growing, was pretty tough, but thankfully, we had a really great shareholder base who were committed to what we were doing and stuck with us through those sort of early years of development.
And yeah, it was tough going, you know, it’s always hard starting a business and building it up, and obviously, building it up to the point where we actually then made a profit and then IPO-ed, it was a bit of a journey. That was basically end of 2015 when we IPO-ed.
So a fair bit happened in between there, and yeah, a fair few stressful moments.
Absolutely. To dig in a little bit more, so a lot of people in the audience, a lot of Motley Fool Pro members that will later be watching at home, they have SMSFs themselves, so I’d be curious to explain a little more for them, what exactly does Class do? And what are the products that you offer?
So fundamentally, what we do is, at the outset, the idea was to automate particularly the accounting side of the self-managed super funds, and what that means is we really started from the view of we should be able to take whatever we can get, particularly if we can get data from source, if we can get data from a broker or from a RAP provider or from a cash provider, and if we can take that information and bring it together and work out what the accounting should be, and automate that all the way through.
One of the challenging things about super is that the superannuation laws and the tax laws around superannuation are quite complicated, and the super reform recently didn’t help.
It’s not getting easier.
But the thing about it is it’s very predictable.
There’s generally only one way to do things, and so that’s great from a how do we automate something?
Because, well, there’s only one way to do it anyway. And so, what used to happen is you’d have fairly highly paid accountants having to make sure they did things the right way.
We basically just took that and codified that and really, what we do for the accountants is, we allow them to automate a significant amount of that day-to-day processing work, which means they’re able to provide out to the planners and to the end investors that they’re working with, an up-to-date view of where their fund is at.
Traditionally, self-managed super funds have had to wait until May the following year, after the financial year’s finished, to get a view of where their fund is at, other than what they might be checking themselves. So being able to provide that live, up-to-date view on what’s going on means that the administrator can provide a much better service. They can be on top of what they’re doing, they can be making sure they’re adding value in terms of strategy and decision-making, and informing their client where they’re at, or assisting the planner
It’s interesting, we live in such a connected world, and yet so often, so many services we have are so primitive in that sense, and we can only get information very late.
Yeah, and unfortunately, accountants in particular aren’t great embracers of technology. You know, because we’re supplying the accountants as users of the software, we’re aware of what they’re using, and they were like the last people to move off Windows XP, you know.
Microsoft had to kill it with a hammer before the accountants would get off it.
Because the accountants are kind of, in a way, your clients, obviously there’s end users, but those are the people you work with.
So how do you reach that [accountants] channel?
It is, a lot of accountants, and so, our clients are the accounting practices, our typical client is an accounting practice that’s in a suburban area or a rural area, looking after a couple hundred self-managed super funds.
In fact, the median is 58, the average is 120 funds. So you’re talking about small businesses spread around the country. For the most part, we have some larger clients as well, but of the over a thousand clients that we have, the vast majority of them are these small accounting practises, and so, they’re generally pretty busy. They’re head down, doing the work. So to get in contact with them can be a challenge, as I said, they’re not necessarily, accountants are not, you know, early adopters by nature.
Right, more cautious.
They’re very conservative, oh yeah. Their general attitudes are just keep doing what I was doing rather than look to do something different. So reaching out to them and finding them, we go to conferences because accountants are professionals, they have to get their CPD points, so that’s the best place to sort of catch them is at a conference or a seminar or those sorts of things, so we do a lot of that.
We’ll do a lot of direct mail out, email, out to the various lists that we can get. We advertise in the trade and industry magazines to again, try and get their attention. We make sure we engage in the various associations, both the accounting and specialist the SMSF associations that they might be engaged with as well.
That’s really about just trying to be where they are and try and get their attention, start the conversation with them and explain how it’s going to be great for their business if they engage with the software.
And is that something you’re seeing shift over time? As Class obviously becomes more established? Is there more that are reaching out to you, or at least more receptive?
Absolutely, yeah. Early on, the real challenge was, accountants didn’t know us from a bar of soap. They hadn’t heard about us. They would kind of go, “Oooh, I don’t know about this.”
Back to conservatism as a barrier.
Absolutely, and so, they would go, “Well who else is using it?” And we’d go, “Well, nobody yet ’cause we’ve only just started.” There’s that real kind of, how do you get started thing. So we were lucky to find a few early adopters who could come on board and actually start using the software, and then what we found is that it snowballs over time because what happens is, the best way to convince an accountant that something works is to have another accountant tell them that they’re using it, and it works.
And so, it’s great, when we’re at conferences now, we’ll be, well, the guys will be talking to a prospect about, you know, “This is what Class does,” then we’ll have an existing user come up and they’ll just start the conversation. If they happen to know them, they’re in the same area or something like that, and next thing, the salesgirl will step out of the way and let the client go, and they’ll demo the software for them. And we’re like, this is great.
So accountants, yeah, they really, they’re very collegiate, because they can’t have lots of industry contact anyway, they always know a whole host of other accountants. So yeah, once you get known, once you get other accountants that you can provide a reference from, it helps tremendously.
I think the other thing is that obviously technology’s changed over the time. When we started, when we launched the product in 2009, cloud wasn’t a thing. It was still “software is a service” at that time, was the terminology people were using, and you’d have to explain to people, what does that mean.
What do you mean I can’t run the software in my practise? I’m not going to load it up on the computer in the corner of my office. You’re going to run it for me? It was great for us that Xero and other companies sort of started promoting the cloud model, and our sales guys, you know, they thought it was great. If they bumped into an accountant and they were already using Xero, it was like, great.
So you already know the cloud pitch. Now I just need to tell you, “Well, we’re like Xero, but for self-managed super funds.” And that really sort of helped, so I think, a lot more accountants now understand the cloud. They’re comfortable with the concept. As is general industry is comfortable with the cloud.
The whole structure is quite different right. Desktop tends to be these one-off sales of software. Cloud is recurring. So what are the advantages for a customer, for a user, what’s does cloud offer that desktop can’t?
The key thing is about, there’s one version of the software, and what we’re going is we’re
continually improving that. So I think as an industry, software development used to be this thing where you would squirrel away for a year or longer, and then you would release something. Then you’d start squirrelling away again, and then, once you’d finished something, you’d go, “Right, now we think it’s ready to go to market. “And now we’re going to try and get it out there, “and we’re going to try and get people to upgrade.” And nobody wants to upgrade. And I think that whole cycle of big changes, what cloud does is change that, because they know it’s continuous development over time, and we’ll make small changes.
So we make small changes every month. So every month, we’ll do a release with small increments, and what that means is, that as users, you’re always on the latest version. You’re not having to upgrade service, you don’t have to worry about whether the service is still running in the corner and whether it’s been backed up, and all that kind of stuff. But you’re always on the latest version, and the changes come through in small increments, rather than you get this
big change all in one go that suddenly, okay, now I gotta reinvent the way that I work. You can adopt pieces over time.
That example of Windows XP is a good example of that old model, right? You build something and that might stick around for decades because no one really likes the new stuff. So what does Class Super offer, versus competitors, and what do you think is the advantages of the product? Why should clients choose Class?
I think it depends on where you’re coming from. I think it’s, as a system of trustees, you should be saying to the accountants, I want access for my mobile phone app, and have a look and see where my fund is at, and see where the contributions came in, or see whether that pension went through, it’s all been dealt with appropriately. So I think there’s a benefit there to the end investor in terms of being able to see where their fund is at.
For the accountant it’s really about the efficiency of what they can do. So the fact that they can provide this great service to the client is obviously a benefit, but it’s also a lot more efficient for the accountant, so, instead of them having to pick up this work at the end of the year. In a lot of cases, when we talk to accountants about self-managed super funds and what they are to their business,so our typical client, 25% of their revenue is coming from self-managed super funds, but it’s often marginal business, so they’re doing it because they’re also doing the small business accounts and the individual accounts for those the trustees that they’re doing the super fund for. But the cost of running that is actually, the administration, they end up having to do write-offs on the cost of the administration because it’s so inefficient.
And so what essentially it’s about is saying, “Well, we’ve automated all of the, “up to about 80% of the accounting.” Which means, they’re just having to deal with the sort of exceptions here and there, and it streamlines that and makes it a profitable part of their business, so, that’s really the key to it.
In terms of what we do that I guess the competition doesn’t do, the big one is that we started from the view that we wanted to automate the accounting, so we have this automated general ledger. We never ask the accountant to pick a general ledger account. So in a traditional accounting solution, at some point, if you’ve got a dividend comes in, and some brokerage on it, you’re going to have to split the amounts up, and then you have to say,”Oh, that’s going to go into account 456,and that one’s got to go into 789,” and so forth.
So you need to know which account numbers you need to put things into traditionally, and journals, and make sure all of the various journals kind of match up into the different accounts. We automate all of that. And we do that for every transaction. What our competition do is they’ve seen that, seen that that’s efficient, and they’ve done that for some of the transactions, but not for all of the transactions, and what that means is that things like data feeds, if you can’t do all the accounting in an automated fashion, there’s no point having the data coming and spraying in like a fire hose, and then there’s nothing to catch it. And so any time a transaction requires you to pick an account code, you can’t automate it, because you got to stop, put it in a suspense account, and wait til someone comes along and tells you what it’s supposed to be.
So the key difference is this automated journal ledger, and what that means is we can then process everything that comes in through the data feeds, including corporate actions. And I guess the other thing is the breadth of our data feed, so we have nearly 100 platform feeds so the RAPs and IMA, SMA type products that feed into Class directly.
The reason that we have, a major competitor has eight of those. The big difference there is really around that ability to process that data. There are a couple of key differences, there’s a whole host of other differences like supporting international markets and other things, but at the heart of it, it’s that automated general ledger that really the secret.
We look at a lot of companies and something that we really like is high retention rates, so we generally like companies that have retention rates north of like 80%. 85% is getting pretty great. 90% is really great. And then Class is over 99%.
So can we hear a little bit around why is that, why are the retention rates so sky-high, monstrously high, for that business?
So I think the key to it is that it’s really hard to get accountants to move systems. It’s really hard to get them to move what they’re working on. One of the differences between what we do versus, say, MYOB and Xero is, because they’re selling to, let’s say Xero mainly, I think, ’cause MYOB can sell to the accountant as well, but Xero sells to the small business owner ultimately. They’re the one paying the licence fee.
Our licence fee is paid by the accountant, and the reason for that is, within the small business space, it’s the small business owner who’s doing the day-to-day work on their business.
In a self-managed super fund, that work, the day-to-day accounting of the self-managed super fund is being done by the accountant. So getting the accountant to change what they do as a practise on behalf of all of those funds they might be looking after is a big deal. It’s hard to do.
But once you get them to change that, it’s hard for them to want to change again.So part of it is just that simple inertia. It’s a bad thing to have to sell into them, but once you’ve got them across, then they’re also not that keen to move.
So there’s that, but I think the other thing is, we deliver on what the promise was. We’re giving them that efficiency. They’re seeing profitability. The practises that are using Class, over the last five years, have grown 20% per annum in the key, that small space, so we won’t talk about the larger ones ’cause there’s some different challenges for the larger clients, but in the 25-100 fund range, those accounting practises average 20% growth per annum over the last five years.
Take what was a marginal business and actually turns it into a profitable business, and growth centre for their business.
Right because it’s more efficient.
So I’m curious, with such incredibly high retention rates, why would or why do you ever lose customers? What are the reasons that customers ever leave?
The clients that we tend to lose are the small ones. So, what we tend to find is, because we’re all about efficiency, if you’ve got someone who comes on and they’ve just got 10 self-managed super funds, for them, it’s not a key part of what they’re doing as an accounting practise. It won’t be 25% of their revenue, it’ll be some smaller portion. And what tends to happen is, they’ll go, “Oh yeah, I think maybe I’ll grow my SMSF practise.” And then they get distracted and do something else, and what they’ll realise after a while is they haven’t really been getting any benefit out of it.
Because they’re not using it.
Because they’re not really focused on it. They haven’t gone and set the data feeds up, and so forth. If you look at our retention rate graph, it was lower back in, sort of, 2013, the 2012 period, and one of the things we changed back then to drive that retention rate up was we were finding that what was happening was we’d sign the accounting practise up.
They’d get the message and think, oh, this is great. And then we’d come back three months later, and they’d go, “Your software doesn’t work. It’s not very efficient, it’s not helping.” And it’s like, well, have you set up the data feeds? No, have you staffed the training modules? No.
– Have you turned it on yet?
– Have you changed anything in your practise to actually take advantage of the software?
And so what we’re finding is that the practises weren’t necessarily good at change managing. They weren’t very good at actually working out what they needed to do. So what we instituted back then was that, we built a consulting team, and every time we sign up a new client now, we take them through a 90-day onboarding period. And what that is, they get assigned a consultant. They basically do a plan with them to say, well, how many funds have you got? How are we going to move them across? When are going to move them across? Where are they up to from a tax processing point of view? What products are they using? Which data feeds can we get set up?
And really does, it helps them to do that change management plan to make sure they set up the data feeds, making sure they do a training plan for the staff, that they all go and sit the modules and do the self-assessment and do the training. So that by the end of that 90 days, the goal is that they have half of their funds on, and that they’ve got all their staff trained, and that they’ve got good progress, a good process in place for setting up their data feeds and proceeding.
And that’s really helped with that retention rate, is to make sure that when a client does come onboard, that they really do know how to use the product effectively.
So one group that you’ve flagged since way before the IPO. I think you issued an extra prospectus about it was, about some customers whose portfolios are administered by AMP?
So for members who aren’t maybe that familiar, what happened? And also, it seems to have taken those customers a lot longer to move off your platform, and I’d be curious to hear a little bit about why that is.
Sure, yeah. So AMP started the AMP SMSF business in 2012. They had a 49% shareholding in SuperIQ. Just after that, they bought a business called Cavendish. So Cavendish and SuperIQ were both clients of Class. They also had another business already called MultiPort, which they acquired through the acquisition. And so they had a mixture of funds. Some on SuperMate, some on Class. They did a whole bunch of other acquisitions over the last five years as well, built up a fairly large pool of funds that they’re administering, and they had an opportunity in 2015 to basically buy one of our competitors, a company called Super Corp, they had actually acquired a 20% shareholding or thereabouts a bit earlier, I think sort of 2013, or thereabouts.
So again, they’d had shareholdings in both Super Corp and Class through that period. I think opportunistically, they had an opportunity to buy that holding, and I think they just decided that owning the software themselves and being able to use that for what they were doing in that space, just appealed to them.
And that was, I guess, the rationale.
And at that point, they gave two years’ notice on the SuperIQ funds, sorry. So they have about 11, I think the last number reported, at 11,300 funds on Class, so a reasonable chunk. About 7% of our revenue, I think. I think, since then, what they had to do was do some retooling, built some systems out to move across,and I think as generally happens with these large institutions, it takes them a little while to do that.
So I think the, it’s October this year that that notice period runs out on the SuperIQ business. So, we’d expect them to move the funds at some point.
But as you said, they haven’t really moved any yet.
Yes, it’s been interesting to watch. So I guess it gives some show of just how sticky the product is in the sense that, it’s not that easy to go out and build something like this to move them across.
It’s certainly not.
I’d be keen to hear about the trends that are affecting the industry at the moment, particularly around the kind of super reform, so I think we talked about this last time that you and I spoke, so I’d be keen for our members as well, to hear a bit about those reforms and how they affect the industry they operate under.
Yeah, I think most commentators have been saying that these are the biggest changes in 10 years. So the biggest changes since Costello changed the superannuation rules in 2007. And they are, they’re dramatic changes. There’s a lot of work, we’ve got a lot of work to do in the next 12 months in terms of implementing the changes, and I think the industry has a lot of work in terms of working with the SMSF trustees around what the impact is on, particularly if they’re over the 1.6 mil balance, but also just there are various other impacts across the board that are impacted.
One of the key ones for us is that, again, it makes it more complicated.
The more complicated it is, the more important it is to have technology to help you deal with that complexity.
But the other thing is the government is moving to real-time reporting, so they’re more and more asking that the self-managed super funds, when they make a decision, that they record the impact of that decision. And so going forward, particularly around the balance transfer cap, around the 1.6 million limitation in money-moving in and out of pension phase, any time money moves in or out of pension phase, you’re going to have to report on that within 10 days of doing it.
And what that means is, you can’t wait until May the following year to actually decide whether the money you took out in the January before was a commutation or a pension payment.
You’re going to have to decide at the time that you do it whether it’s a commutation or not.
I think you will see that as a trend over time, that the regulators are going to more and more want to see that if you make a decision, that you report it sooner rather than later, and preferably in real-time. They started this in probably the Super Stream legislation around the contributions and having that basically be reported as it happens, and I think that it’s a big change.
I think if you are using Excel spreadsheets or using a free copy of MYOB to keep track of your self-managed super fund. I think, they’re not going to be able to meet those requirements, it’s going to be very difficult to stay on top of the fund to meet those, and so for us, that’s probably the biggest change.
Obviously, people have to take action and deal with the impact of the 1.6 million cap and so forth, but I think that the government is going to want you to report real-time.
And that, as you mentioned, is an advantage, right? Compared to some competitors that don’t have those same feeds and links?
Yeah, I think one of the other big changes that you’re seeing is particularly the desktop products are being end-of-lifed. So people talk about cloud and the fact that you need to move to the cloud, and basically you won’t have a choice, so,what you’re seeing at the moment, so in terms of competitors, the Super Corp product, the one now owned by AMP, is a cloud-based product. The BGL has both a desktop product and a cloud product.
Reckon used to have a desktop product called Desktop Super, creatively, and that product’s been end-of-lifed, it was bought by AMP and sort of folded into what they’re doing.
So that’s due to be shut down in August 2018.
BGL has taken their desktop product off their website. They’re not really marketing it anymore. They’re under-investing in it, you won’t be able to do tax lodgements from June this year, so they won’t be implementing a new SVR2 technology to support that going forward, so using a desktop product is not really an option going forward.
BGL has also said that, if you’re using the desktop product,they will make changes to support the Super reform, but you’ll find it hard because they’re not going to kind of do everything they need to do.
And how much of the market, do you think, still has to move to the cloud?
Yeah, so there’s only about 30% of the market. 30% of self-managed super funds are in the cloud at the moment. So there’s about, 70% a whole chunk that still got to move across.
We’re waiting to see the latest investment trends to get this year’s numbers, but based on last year’s number, there was about 44% or thereabouts that’s on desktop solutions that needs to move across.
There’s about 15% that are accountants who are using Excel and general ledgers to keep track of self-managed super funds, so they’re not using a purpose-built product at all.
And then there’s about another 15% that, or around, again, the numbers are, it might be 12%, 15%, something like that.
That are the trustees themselves looking after the fund directly, and they’re Excel and maybe a general ledger product to keep track of it.
So all of that, at some point’s, got to move to the cloud.
So a very big push into the industry that you operate in. And it’s one that you have
a very dominant share in. I think you had a release recently that said over 60% market share of the cloud segment. Why do you think that was, that you were able to capture such a big share?
Well, I think first, we launched in 2009. BGL didn’t launch their cloud product until 2014. You know, they gave us a five year head start, so that was nice of them.
Yes, a good freebie.
Gave us plenty of time to get things right, so I think we got a significant lead in terms of the product, so we still have about an 80% win ratio. So when we’re up against BGL, in head-to-head selection, we’re winning 80% of those.
And I think that comes down to the ability to reference the product with the other accountants
who’ve been using it for, in some cases, up to five years, saying, “Yeah, it actually works.” But the other thing is, I think, the product is just mature. We have a product that has been.
Tried and tested.
Yeah, exactly. It’s already being used by over 1,000 accounting practises, and used by some of the biggest administrators in the country. So yeah, just. Good head start and continuing to invest, and I think that’s really important in this sort of subscription software space. If you aren’t continuing to invest in your product, it’s a kind of Alice in Wonderland thing, you’ve got to keep running just to stay in the same spot. And we’re doing far more than that, we’re making sure we invest in the products and we continue to build.
We recently released the mobile application. We already had a responsive design solution that would work on a mobile phone. But having an app, you can download it from the app store, and it’s just that much more kind of easy to use on your phone. You know, we continue to innovate and invest in the technology.
Something that a lot of members are interested in is how much Class can keep growing.
You’ve talked already about quite a big tailwind, I think, that’s pushing towards cloud, but what about the revamped BGL Super product, and what impact will that have on the business moving forward?
I think, I think when you look at the BGL product, effectively it’s a new product, they’ve had to build it from scratch.
Because the other one wasn’t working out?
Well, no because it was a desktop solution, and one of the things that you’re seeing is that the desktop providers have found out the hard way. You can’t just take a desktop product and just throw it in the cloud, that’s not how it works.
So you saw Reckon and MYB try and do that. Didn’t work very well for them. And you’ve seen that it’s the businesses that take products and built them purpose-built for the cloud that are having success, so businesses like Xero and Class.
We’ve built a solution that works in the cloud, and I think it took a lot of the desktop providers awhile to figure that out, that you can’t just take what you were doing and just translate it to the cloud, it doesn’t work.
But I think the other thing is that, I don’t think that the BGL product gets this idea that you need to automate the general ledger. I think they are still trying to replicate some of the things that we do, but then they miss the point on some of them. So, with their contract notes, for example, when they have data coming through from a broker they use.
Rather than go and build the feeds to plug into the broker-backed office systems, they’re actually getting a copy of a contract note, so they get a buy and a sell. So they can deal with buys and sells, that’s great. But if there’s an off-market transfer, if there’s a DRP, if there’s a corporate action, they get nothing.
Whereas what we get, because we’re plugging into the broking systems, we get daily balances. So we know at any day, what you held. So we know that you’re entitled to a dividend. What’s more, when it comes to the payment time, what we will see is we’ll see you balance changed and went up by, oddly enough, about the amount for the DRP.
And we also get a chest adjustment that tells us, well, now specifically, it was for the DRP. And we can work out the difference in terms of what you’re entitled to, so there’s a residual there and we can kind of account for that as well.
So we can do all of that, whereas products like BGL just are blind on that, they don’t see anything at all, ’cause there’s no contract note.
So I think there’s still a pretty significant gap in terms of where they’re at in terms of their product and maturity, and what that leads to is their product just doesn’t give the same level of efficiency as what they can get from Class.
And do you think some of that comes from their kind of roots in the desktop world? Although they are building cloud now, they’re still thinking in that mindset?
Yes, they started as a general ledger system, and then what they did was added bits on top to support a self-managed super fund, whereas we started from the point of view of SMSF administrators, what do I need to do?
To do administration really well and provide that service? And the accounting has to be done, we get that. But the accounting is not the reason this thing exists, and in fact, I don’t want to have to post journals manually, I want those to just happen. And we do all the journaling under the covers.
You still get all the financial reports and the trial balance and everything else, you can always begin and see where all the postings went. So the accounting absolutely has to be there. But you don’t want anybody with their fingers in it trying to fix it, manually do that.
Absolutely. So given the, what I would refer to as customer captivity, I’m sure you don’t put it that way, but customers are very sticky. There’s a lot of across and upsell opportunity, so I’m just kind of curious, how do you think about other demands?
And one in particular I want to dig into first is Class Portfolio. So it’s a new product you brought out. Just to kind of talk us through that product in particular, I guess to get started. What led you to launch that?
Actually, as far back as 2011,we had clients who were using Class Super, and we’d get a support call saying, “How do I load up this family trust? “I’m trying to load it up and I can’t “load the beneficiaries anywhere,” ’cause it keeps telling me to put members in.”
And it’s like, “You know it’s a super product, right?” So what we ended up doing is that back then, we went, okay look, we’ll turn off the super bit so you don’t have members and whatever else. So we kind of took stuff away, and then we went, “Okay, now you can use it for non-super.” And we had a few people who were doing that.
And it wasn’t till much later when I guess, we were starting to think about, okay, we’re getting good traction in the super space. This is working, it’s growing nicely.
It’s going to be another few years before we saturate that market, so we got plenty of time, but what are we going to do next? And so then we had a serious look at outside super. What we realised is that there’s just as much money outside super as there is inside super, arguably more.
And in fact the feedback from the accountants was yeah, these same clients that I’m looking after their self-managed super fund for, I’m also looking after their individual portfolios, or I’m looking after the family trust.
And so, what we started looking at was, well what do we need to do to better support that? Let’s add some stuff back that actually helps with the beneficiaries for the family trusts and dealing with their unpaid present entitlements and dealing with their loans and other things that are particular to that.
A product that’s more suited for what they’re doing in the non-super space. There’s also some accounting changes that you have to support. In super funds, you have to carry the assets at market value. You’re not allowed to carry them at cost. But in trust, you can carry them at cost. There’s some few other bits and pieces that we had to do to support the different style of portfolio, but essentially it’s all that money that people have outside supers, again, the feedback is if somebody has a $1.1 million SMSF, then they’ve got just as much money outside super as well, and it’ll be in various structures.
It seems like it could be quite a big new area for you. There’s almost as much money outside super as in super-based products. Could it be a similar size portfolio count later on?
Yeah, absolutely. The challenging thing about the non-super space is it’s a bit amorphous. There isn’t like all the research that we get like we do with self-managed super funds. In self-managed super funds, the ATA publishes numbers every year, and there’s a whole bunch of researchers that look at numbers in the self-managed super space, so it’s really easy to get numbers.
When you talk about family trusts and other investment portfolios outside super, it’s actually a lot harder to get the numbers, but having looked at what the ABS and Rice Warner and others have said about the private investment space, our conclusion is, we think there’s about, we’ve taken out all of the really small portfolios of people who might have some (mumbles) because they got it when it floated, to whatever, or got other things, and they might just have one or two stocks.
So if you take all of that out, by the time you filter it down, there’s about two million portfolios where we think Class Portfolio would be relevant. They’re of appropriate size, appropriate complexity, where they’re potentially. And we think there’s about $2 trillion worth of assets there, so it’s about three times as high as super actually.
Who are the major competitors in that space [Class Portfolio], and how do you see them competing? So a lot of people in this room have heard of Sharesight, for instance, so curious how you see them?
Look, no definitely, so Sharesight, I guess the main difference between us and them is they’re a retail play, so direct to the consumer. We’re, at this stage, still focused on providing the services to the accountant. So I think if you’re running a Share portfolio, and you’re working with your accountant, then if you looked at what Sharesight’s doing, you look at what Class is doing, there’s a fair bit of overlap.
In fact, Sharesight has a Sharesight Pro offering, and I would say we compete directly with that because the Sharesight Pro offering is for planners and accountants who are working with share investors, so definitely got some overlap there.
Probably the key one would be the Praemium V-RAP product. So Praemium is obviously involved in a lot of other things. Their key driver at the moment is their IMA/SMA offering, that’s where they’re getting all their growth. But in the V-RAP space, I guess we do a similar sort of service, so there’s some overlap, you know, in that space as well.
Yeah, there’s not. When we surveyed the accountants and said, “Well, what are you using?” Accountants don’t tend to be using Praemium or Sharesight to track of this.
They’re using Excel?
They’re using Excel. 80% are using Excel
So I’m keen to just get your take on that, obviously, you have a lot of advantages within this sphere. Do you think that those would apply into other markets, or do you think it’s better to focus on Australia?
At the moment, we’re very focused in Australia. The self-managed super space is unique to Australia. There’s really nothing like it in the rest of the world. There’s the SIPs in the UK, which are somewhat similar, but other than that, there’s not a lot out there. So super’s really not that translatable into the rest of the world.
In the Class Portfolio space, I can’t see any reason why we couldn’t down the track, translate that to other regions.
I would be keen to get your thoughts on acquisitions. Do you see any opportunity for acquiring some of those companies that were desktop focused to move their customers over to the Class cloud, or is that not something that you’re really interested in?
There’s not a lot of competitors in this space, so it’s not like there’s a number of small players that we could look to buy up, but really the desktop super product from Reckon was about the only one that was kind of likely to come up. That’s been purchased by AMP as part of a strategic arrangement between AMP and Reckon, so I think at this stage, given there are really effectively three major providers in this space, there’s not a lot there for opportunity for consolidation.
What we are seeing more of is that within our partner ecosystem, there’s potential there. We get approached pretty much every week by a Fintech start-up who wants access to the client base and has a great offering, you know, in various different sort of, whether it’s peer-to-peer lending or it’s advice or it’s a number of other sort of new financial products, they’re sort of keen to work with us.
Our general approach at this stage is to work with them as partners. We’re more interested in working with them as partners and doing a revenue share where it’s appropriate in terms of the services they’re providing.
Over time, if it makes sense to fold some of those services into what we’re doing, if something comes along where we go, “Actually, that makes sense to be really “just part of the inner circle,” then we would look at those things.
And we’ve looked at a number of opportunities in those spaces, but nothing that.
As I mentioned backstage, I think I’d seen you a Fintech conference, so I can see you’re keeping your eye on these up and coming small companies and what they could do.
How does Class think about investing in R&D, some something that’s been different between yourselves and some other growth companies in this space is that you are profitable, you’re paying a dividend every year, so how do you think about balancing that, and how do you invest in R&D over time, and balance those two together?
I think early on, we very much had a discipline about, we want to be running a profitable business, we’re not going to just grow for growth’s sake.
I think that there are good reasons why other businesses might adopt that strategy.
But I think in our case, we felt that it was important that we were building out a commercial operation. I think it’s good discipline, it makes you focus on where you’re investing.
What we don’t really do is limit that investment by saying, “No no, we’ve got to make “this particular profit margin,” or so forth. So what you’ll probably see us doing this year, for example, is the super reform requires significant investment.
We’re going to have to make that investment, we have to do that work. Last year, you saw us make a significant investment in the Class Portfolio product. So we spent $2.5 million for the first half on development, and 1.1 of that was on the Class Portfolio product. I think you’ll continue to see us investing in the products to develop them out.
As I said earlier, if you’re not investing in the products, if you’re not innovating, then you’re going backwards.
Do you see the expect dividends to be increasing over time as a result of that progress, or do you expect to be piling cash back into some other new product launch?
Look, we’re going to continue to run a profitable business. We will make investments where it’s appropriate to make investments. The current level of investment in the products that we have but as I said, we then have to deal with market conditions, so if there are things like big regulatory reform, then we need to react to that. But look, our intention is to continue to run a profitable business, so there will be dividends.
And intention is obviously to increase them over time, but we’re not going to do that at the expense of doing things we must do, you know, that the business requires us to do.
Completely understand, and I certainly appreciate that. Thank you very much for joining me, Kevin Bungard!
It’s been a pleasure.
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Matt Joass, CFA and The Motley Fool Australia own shares of Class Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.