Is the Class share price a buy?

The Class Ltd (ASX: CL1) share price has fallen 2.94% to $1.48 following the release of the financial software services provider’s interim results on Thursday.

For the half-year ended 31 December 2018, Class grew operating revenue by 12% to $19.0 million with earnings before interest, tax, depreciation and amortisation up 11% to $8.6 million. The company’s annualised recurring revenue, which is the number of accounts at the end of the period multiplied by average revenue per user rose 10% to $37.1 million.

On the bottom line, the company reported a 2% rise in net profit after tax to $4.4 million. The subdued growth in net profit was attributed to a significant $4.4 million investment ($3.3 million was capitalised) in product as Class intends to add new features to its software.

The growth rate of SMSF and Portfolio accounts added has noticeably slowed over the last couple of quarters. For the December half-year, Class added 4,799 net new accounts, bringing the total amount of accounts to 174,212. The growth in the number of accounts won has been stunted due to regulatory headwinds surrounding the sector and increased competition. Furthermore, AMP Limited (ASX: AMP) continues to migrate off the platform with approximately 2,150 funds suspended during the first half.

Class continues to increase its market share in the industry, with the company’s market share now at 28%, up 3% over the prior corresponding period. Pleasingly, 21% of new accounts added have been from other cloud products as Class continues to win market share from its competitors.

However, it should be noted that the costs of winning new customers have risen sharply. Customer acquisition costs (sales, marketing and implementation expenses divided by gross new accounts added) rose by 31% over the prior corresponding period to $177.

Foolish takeaway 

The Class share price has fallen 48% over the last 12 months as the company’s premium valuation multiple has shrunk due to the slowdown in new accounts added. Consensus FY19 and FY20 earnings per share have been revised downwards by 28% and 35% respectively over the last 12 months. Possible legislative changes regarding the refunding of imputation credits and its impact in the SMSF space is another issue that has been a concern for investors.

Class is currently trading for around 20 times trailing earnings. In light of the slowdown of new accounts added and the intensified competition in the sector, I am inclined to stay on the sidelines until there is a material change in the company’s circumstances.

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Motley Fool contributor Tim Katavic has no financial interest in any company 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.

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