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Class Ltd shares edge higher on earnings release: Should you invest?

In morning trade the Class Ltd (ASX: CL1) share price has edged 1% higher to $2.96 following the release of the cloud-based SMSF accounting software provider’s half-year report.

Here are key takeaways from today’s release:

  • First-half sales revenue came in 21% higher on the prior corresponding period at $17 million.
  • Earnings before interest, tax, depreciation, and amortisation (EBITDA) was $7.8 million, up 23% on the first-half of FY 2017.
  • First-half net profit after tax increased 19% to $4.3 million.
  • Diluted earnings per share of 3.6 cents.
  • Interim dividend of 2.5 cents per share, payable March 7.
  • Total of 158,153 accounts on its platform, compared to 143,944 at the end of FY 2017.
  • Market share increased to 25%.
  • Outlook: Challenging second-half.

Overall I felt Class delivered a reasonably mixed first-half result. The main driver of its revenue growth was the increase in accounts which grew by 27,937 on the prior corresponding period. This led to annualised committed monthly revenue (ACMR) climbing 19.4% to $33.7 million.

However, there are negatives and one was the 20% increase in its costs of undertaking business. This increased to approximately $1.5 million, with over half of these costs being associated with client acquisition, increased resources and marketing spend, and the Class user conference.

The company’s cost to acquire a client (CAC) increased 20% to $135 per customer, compared to $112 per customer a year earlier and $114 per customer at the end of FY 2017. This could be an indication that competition is heating up or that the remaining addressable market won’t be as easily acquired.

This wouldn’t be too bad if the average revenue per unit (ARPU) was growing, but unfortunately it isn’t. For the first-half of FY 2018 Class Super reported an ARPU of $215 and Class Portfolio achieved an ARPU of $139. This compares to $218 and $147, respectively, from the prior corresponding period.

Furthermore, earlier this week AMP Limited (ASX: AMP) has advised that it has finally commenced the migration of its funds to its own in-house service. AMP currently accounts for 9,500 funds on Class and made up less than 5% of its ACMR. While no timeframe has been given, I feel this could potentially mean a step backwards in the number of accounts on its platform in the second-half.

Should you invest?

Whilst I am a big fan of Class and its software, I wouldn’t be a buyer of its shares until there’s a big improvement in its key metrics.

The second-half of FY 2018 looks likely to be a challenge period for the company and I suspect its shares could underperform as a result.

In light of this, I would sooner buy the shares of other fintech stars such as Hub24 Ltd (ASX: HUB) or Netwealth Group Ltd (ASX: NWL).

Alternatively, these high-flying growth shares could be even better investments.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns 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.

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