Class share price crashes 17% on 1H20 profit slump

The Class Ltd (ASX: CL1) share price was down as much as 17.39% today following the release of the company's interim 1H20 result.

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The Class Ltd (ASX: CL1) share price was down as much as 17.39% today to an intra day low of $1.71 following the release of the company's interim 1H20 result. At the time of writing, Class shares are trading 14.49% lower at $1.77.

How did Class perform in the first-half of FY20?

For the half-year ended 31 December 2019, Class reported operating revenue growth of 8% to $20.5 million. Earnings before interest, tax, depreciation and amortisation (EBITDA) fell 7% to $8.1 million, while net profit after tax decreased 30% to $3.1 million. The Directors of Class also declared a fully franked interim dividend of 2.5 cents.

The fall in profitability occurred due to a number of factors. A substantial 25% increase in product investment was the main catalyst with the software provider lifting product investment from $4.4 million to $5.5 million for the period. Increased investment is a key component of the company's reimagination strategy where it is planning to invest $12 million in FY20 on product and technology development.

The rise in product investment saw Class expense an additional $1.1 million of development costs compared to the prior corresponding period (pcp). Depreciation and amortisation also rose $1.0 million in aggregate for the period. Part of this was due to the adoption of the new leasing standard AASB16 that resulted in a depreciation charge of $0.4 million.

Furthermore, the company also recorded $0.5 million in acquisition and corporate advisory costs for the period. This was in relation to its NowInfinity acquisition and exploration of other opportunities. 

Market share continues to grow

As at 31 December 2019, Class had a total of 183,955 accounts (30 June 2019: 179,082). This includes 174,360 self-managed super fund (SMSF) accounts on Class Super and 8,875 accounts on Class Portfolio. 

The company uses a data-driven approach to target sales in areas where they are underweight in comparable market share. As a result, Class' market share rose 3.1% on the pcp.

The company continues to outgrow the overall market and now holds a 28.4% market share in the SMSF software market. However, the growth in total accounts has materially slowed over the last several quarters. Customer acquisition costs noticeably rose by 20.3% to $213 for the period. 

Outlook

Looking forward, Class is targeting an EBITDA margin in the underlying business of 40%. The company is also aiming for 14% revenue growth in FY20 inclusive of the NowInfinity acquisition. Class expects NowInfinity product revenue in FY20 to be around $7 million. 

Other notable fallers on the ASX today include Altium Limited (ASX: ALU), who released its half-year results after market close yesterday, and Netwealth Group Ltd (ASX: NWL) who released its results this morning

Tim Katavic has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Netwealth. The Motley Fool Australia owns shares of Altium and 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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