Day of Reckon-ing is coming
This February the training wheels come off for Reckon because its deal as distributor of QuickBooks, the online product of US giant Intuit, will come to an end. Reckon has about 40 per cent market share and it is generating good cash flow. There are question marks over whether this will continue to be the case.
"The market is saying, 'Do these guys know how to build a product?"' says Nick Harris, technology analyst with stockbroker RBS Morgans. "All [Reckon has] done before is repackage and develop a product that was developed in the US by Intuit, a billion-dollar company that spends hundreds of millions of dollars on R&D."
Reckon's share fall has to be viewed in context. At $2.13, its market cap is $274 million, a fraction of its competitors. MYOB was bought by private-equity company Bain & Co for $1.2 billion, while New Zealand-based Xero's shares have almost doubled in the past year, delivering it a market cap of $1,970 million. Technology One, which is in a similar space, albeit at the corporate end of the spectrum, has also had stellar performance. Its stock has risen almost 60 per cent in 12 months, giving it a market cap of $640 million.
The differing valuations could be used as the basis of a Harvard MBA case study, because the highest valued, Xero, isn't making money. This comes back to the importance for Reckon to establish its Reckon One online product, fast. If it can, it could be one of the big-value plays on the ASX, but if it can't it could lose its shareholders even more money.
Reckon is trading on a PE of 13 times, compared with its 10-year average of 16 times. Technology One has the same 10-year average, but is now on a PE of 21 times, while Xero has zero earnings.
Why the disparity in valuation? A big part of the answer lies up there in the "internet cloud". The "cloud" is lucrative because it means small and medium-size accountants don't have to spend thousands on servers and software. It's all owned and managed directly by companies such as Xero, which sells its services to clients.
Reckon is definitely at the crossroads. If its online product can prove its cloud credentials, shareholders are in for a profitable ride.
Richard Hemming edits the fortnightly newsletter Under the Radar Report: Small Caps.
Frequently Asked Questions about this Article…
Reckon’s shares fell more than 16% since mid‑August after the company released its full‑year results. Investors are nervous because Reckon’s distribution agreement for QuickBooks (Intuit’s online product) ends this February, raising questions about whether Reckon can replace that revenue with its own online offering.
Reckon One is crucial: the article says Reckon must establish its Reckon One online product quickly. If Reckon proves its cloud credentials and builds a competitive online product, it could become a high‑value play on the ASX. If it fails, shareholders could face further losses.
The end of the QuickBooks distribution deal means Reckon loses access to a major online product it has been selling. Reckon currently has about 40% market share and good cash flow, but investors worry whether those metrics will hold once the Intuit relationship ends and Reckon must compete with its own online product.
At $2.13 per share the article values Reckon at about $274 million market cap — much smaller than competitors. MYOB was bought for about $1.2 billion, Xero’s market cap is cited at about $1,970 million, and Technology One’s market cap is given around $640 million after a near‑60% price rise in 12 months.
Reckon is trading on a PE of 13 times, below its 10‑year average of 16. Technology One has the same 10‑year average but is trading at about 21 times now. Xero is noted as having zero earnings. These differences reflect investor expectations, growth prospects and the market’s enthusiasm for cloud businesses.
The cloud matters because it lets small and medium accounting firms avoid buying and maintaining servers and software. Cloud providers like Xero manage services centrally and can scale recurring revenue, making the cloud model highly lucrative and a key reason for higher valuations among cloud accounting companies.
Key risks include whether Reckon can successfully replace revenue from the ending QuickBooks distribution with its own Reckon One online product, market skepticism about Reckon’s ability to build a competitive cloud product (as quoted by analysts), and the possibility of further share price weakness if cloud adoption or product rollout disappoints.
Investors should monitor progress and proof points for Reckon One’s cloud functionality and customer adoption, any updates on revenue and cash flow after the QuickBooks deal ends in February, and management commentary on product rollout timelines — these will indicate whether Reckon can regain investor confidence.
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