The Class Ltd (ASX: CL1) share price is up 7% in response to its annual report for the period ending 30 June 2018.
The cloud accounting software provider grew operating revenue by 18% to $34 million. Most companies would be pleased with that, but Class saw average revenue per unit (ARPU) (account) fall from $216 to $215 in the Super segment and the Class Portfolio segment saw ARPU fall from $147 to $139.
Earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 14% to $15.9 million. Class increased its workforce by over a fifth and its customer acquisition cost (CAC) increased from $114 in FY17 to $144 in FY18.
Net profit after tax (NPAT) grew by 8% to $12.6 million and earnings per share (EPS) increased by 9% to 7.3 cents. The dividend has been increased by 25% to 5 cents per share.
Despite profit margins contracting a little, Class had a strong year growing its Class Super market share to 27% from 24% the year before. Class grew its net accounts by 18%, or 25,469. Of this, 22,774 was from SMSF accounts and 2,695. A majority of the SMSF accounts won were from competitor BGL’s legacy systems.
Class Super’s growth was stunted by AMP Limited (ASX: AMP) moving approximately 2,700 accounts in FY18. However, excluding AMP accounts Class had a retention rate of 99.5% for FY18.
Class Portfolio remained a star performer with 83% account growth. Around 70% of Class Super subscribers surveyed are potential Class portfolio users.
The company did say that it is actively reviewing opportunities for alliances, including mergers & acquisitions, in adjacent markets. In FY18 it generated $1.4 million of partner revenue, which represented 4.3% of operating revenue and in FY19 there is an opportunity to grow. With cash on the balance sheet growing by $3.3 million to $22.7 million and zero debt Class has some room to expand.
Over the next few years Class believes it will benefit from organic growth of its customers, SMSF industry consolidation and future SMSF establishments
It will also expand its engagement with partners & financial planners.
Class is currently trading at 31x FY18’s earnings with a grossed-up dividend yield of 3.2%. Class is a quality business but the rise in CAC, reduction of ARPU and slowing growth rate is a worry. I’d want to see what area(s) Class is expanding into before suggesting it’s a buy at today’s price.
I’d much rather put my money towards one of these hot stocks for my portfolio which have a clearer path to sustained growth.
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Motley Fool contributor Tristan Harrison 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 Scott Phillips.