The SMSF cloud challenger

Kevin Bungard is the CEO of Class Super — the cloud challenger in the area of SMSF and accounting platforms for accounting firms, of which there are something like five or six hundred thousand in Australia.

The dominant player in that area is BGL, which is a private company, run and majority owned by Ron Lesh. Class Super has been coming at BGL for a few years from a cloud perspective and is probably similar to Xero coming after MYOB — except there’s a very big difference between the two businesses, Class Super and Xero, in that Xero is worth $7 billion dollars on the share market and Class Super is worth around $250 million. 

But Kevin Bungard explains why that is and also how he goes about signing up accountants. His market share currently is 27% versus 41% for BGL, but he reckons he’s gaining on them and pulling accountants off BGL every year. It’s an interesting story and there’s a lot of operating leverage in the business. 

Here’s Kevin Bungard, the CEO of Class Super. 

Kevin, is it reasonable to compare you with Xero and – BGL, your main competitor – with MYOB, that you are Xero to BGL’s MYOB, is that a decent analogy?

That’s a very common analogy actually.  We started about the same time as Xero did.  We were on that kind of early wave of the cloud, in fact it was still called software as a service at that point.  And really, I guess, looking at using cloud technology to deliver a solution in a market, very similar to the way that Xero has done that in the small business accounting space, we’ve done a similar thing in accounting for SMSF.  And our clients are primarily accountants, are using the software to deliver reporting and capability out to their clients, the investors with the self-managed super fund.

Of course, there’s a big difference between you and Xero, is that their capitalised at $7 billion dollars and they’re still losing money and you’re capitalised at, what, $240 or 250 million, and you’re making a profit.  Obviously, the market’s got a different view of you.

Yeah, I think it’s a different space.  Obviously, Xero is looking at small business accounting world-wide.  They’re obviously investing heavily in an international land grab with some pretty big players when you look at Intuit and MYOB, say to the competitors they’re up against.  Whereas, SMSF is a market that’s unique to the Australian sort of context.  We’re in the market with two other competitors and the market dynamics are quite different.  We’re not selling to small business owners, we’re selling to accountants, so again, it’s a different dynamic.  It’s still a B2B model, but quite different sort of context. 

But it’s interesting because I mean, I sort of half-joke about Xero still losing money but the reason they’re doing that is because they are going for it in terms of, as you say, a land grab.  Is it not a good idea for you to similarly go for it?  And you know, go for market share at this point of your life as opposed to try to make profits?

Yeah, so we’re really looking at building out that share in the market that we’re in.  I guess what’s different, again, in the dynamics is that, when we make a sale it’s the accounting practice that moves and get an accounting practice to change what they’re doing, versus say a small business owner who might just be setting up a business.  I think a lot of Xero’s business comes from capturing small business owners when they setup the business.  In our case we’re talking about established accounting practices and getting them to change what they do in their accounting practice.  The sale lead times on those and the speed at which the accountants move is kind of constrained.  There’s only so many accountants that will move in each year that we can move.  I think if we spent sort of double what we’re spending on sales effort, we wouldn’t necessarily get double the response.  Accounting firms are kind of only moving at the sort of pace that they can move at.  They’re not as easy to sign up as a new business owner, if that makes sense.

What is your market share now?  Because Ron Lesh at BGL claims 70%.  What do you think they’ve got and what do you have?

Class has 27% and as a listed company, I guess our accounts are audited so those numbers are pretty reliable.  I think the BGL number, according to investment trends and independent research firms, is 41%.  I think the 70% is probably a bit exaggerated.  There’s also SuperMate, the AMP-backed product, they’ve got about an 8% market share.  There’s also a large portion of firms that are not using any specific product, they’re still using Excel.  Accountants love Excel and there’s still about 10% of the market that are not using a purpose-built product.

Then there’s a whole bunch of trustees that look after their own fund.  The split of market share is interesting in terms of some of those kind of component pieces.  We’re pretty much focused on the accounting portion, we’re not really focused on that investor who wants to administer their own funds, that’s about 14% of the market I think at the moment.  We’re focused on the rest of the market where it’s an accounting firm looking after the administration and the tax affairs of that self-managed super fund for those investors. 

Your 27%, how has that been growing in the past few years?

It’s been growing at sort of 3 or 4% a year and as I said, in terms of our experiences early on it was very hard to get accountants to really accept the cloud, very hard to get them to accept a new entrant into the market space.  Over the first couple of years, the growth was quite slow.  It sort of picked up in 2013-2014, started to pick up.  We’ve kind of been adding 3 or 4% market share each year since then.  I think there’s only a certain pace at which the accounting industry will move.  We haven’t yet really seen them move for accounting firms, for their practice management solutions to the cloud.  The biggest players there are still really Reckon with their APS, which is an on-premise solution and MYOB still largely on premise with their solutions as well. 

Xero has their Xero Practice Manager within the cloud, but a lot of accounting practices still haven’t really moved their kind of back-office, if you like, into the cloud, even though their clients might be in the cloud. 

What’s your main sales pitch, is it price or moving from desktop to cloud?  Because BGL’s on the cloud as well now.

They are, yeah, they gave us a bit of a head-start.  They released their product in 2014, we released ours in 2009 so they gave us a bit of a head-start.  The main difference is really, our focus has always been around efficiency and it’s been around automating the general ledger, leveraging data feeds as much as possible.  The real value proposition with Class is the ability to be on top of what’s happening with the super fund by automating the accounting as much as possible, really streamlining that and making that efficient for the accountant, but also being able to then hook in the financial planner and the investor who need to see what’s going on with those self-managed super funds and with the latest regulations and reporting requirements, it’s even more important to be up to date.  That’s really kind of our proposition.  We’ll allow you to do more, we’ll allow you to take on more funds.  Our clients are typically growing faster than the rest of the industry, they’re looking after more funds, they’re earning more revenue from what they’re doing.

Can you tell us what you charge and how that compares with what BGL charges?

Yes.  Our headline rate is $250 dollars per annum, so about $23 dollars per month.  Then that comes down as you have volumes, so volume discounting brings that down.  We’re about 30% more expensive than BGL and BGL’s about 30% more expensive than the SuperMate product.  What we’re basically saying to the accounting firms is that difference in price for that sort of extra $70-80 dollars that you’re spending, what you get is efficiency.  It will save you time in your practice and it will improve the level of service that you’re offering to your clients.  That’s really kind of the pitch, if you like.

Does that $250 dollars go on the accountant’s bill to the client? 

No, not really.  I think what you’re seeing in the accounting space in general is that where the accountants are employing technology in order to get efficiency, what they’re then doing is building that into the cost of delivery, if you like, but not necessarily passing that on directly as a line item to the end investor.  If the average fee for administering a self-managed super fund is just under $2,500 and what will happen is the accounting practice will go from charging that fee and pretty much being breakeven in the amount of time that they spend process in that fund to then using class to make themselves more efficient and basically they’ll still charge the client a similar fee. 

They’ll charge them still that sort of average of $2,500 to administer the fund.  It really allows them to then deliver a service that’s more up to date, that’s more efficient, that’s giving them better reporting, mobile applications to trustees and so on, so for the same price they’re delivering a better product and also making a better margin for the practice.

I imagine it massively increases their margin?

Yes.  I think what we’ve seen is that as more of the market has moved to the cloud, you are seeing more competitors coming in at a lower price.  I think the admin cost will come down.  They haven’t really come down a lot over the last few years.  Obviously, the super reforms have meant there’s been additional cost in there, so that’s really kind of been an artificial pressure on keeping prices up.  I think going forward you will see more competition, you will see administrators coming in.  We work with a number of newer administrators as they come into this space and there’s a lot more that are looking to compete on price, we’re coming in with a cheaper admin offering who are leveraging technology to provide a better service at a lower price point.  I think it would get more competitive in the future.

Does the fact that you’re a public company make it harder to compete against BGL since they’re a private company?  Is that a factor in the contest between you?

I think it’s always a challenge, I think you would know from talking to anyone who’s listed.  It’s always a challenge when you’re listed in terms of the concerns that you have in running the business, you’ve always got to think about what you’re doing and how you’re communicated to the market.  But it doesn’t really strange what we’ve been doing in terms of our strategy, in terms of building out our capability and the strategy in terms of future direction of the business. 

I think potentially if you’re looking at what BGL is able to do in terms of – they can make claims like having 70% market share and they don’t have the same sort of test as to having that kind of audited or the same ASX rules around what you can and can’t say.  I think it gives them more ability to sort of create uncertainty and doubt.  But other than that, that’s not something we’d want to do anyway.  I think we’d much rather be stating where we’re at and what we’re doing but it makes for an interesting space. 

Can you give us a sense of your operating leverage?  Obviously, your 27% market share did produce revenue of $34 million in the year just finished.  What does an extra 1% market share turn into in terms of revenue?  And then in terms of margin, what does that do to your margin which I think is around about the 47% mark?

That’s right, yeah.  The operating leverage is obviously pretty significant.  Really, like a lot of software as a service businesses, cloud software businesses, your costs are really sort of front-loaded in terms of customer acquisition and product development.  Then ongoing, the more clients that you’re signing up, obviously the more leverage that you’re getting out of that investment that you’ve made in products.  It costs to bring clients on, particularly when we’re running campaigns where we will give clients access to the software for a period of time for free.  Currently, we’re running a campaign out for the 1^st of July, if you sign up you don’t pay until 1 July next year. 

That has a cost in terms of acquiring those customers, but with software as a service it’s all about signing up that client at first, there’s a cost that you take the hit in that first year.  The ongoing leverage you get there is significant.  But it’s similar to if you look at a Xero or any other software as a service business, you’re looking at a sort of 70-80% gross margin on a delivery cost.  That is not to downplay the importance of continued investment in product.  What you don’t want to do is fall into the trap that businesses like Reckon fell into where you aren’t making that sort of reinvestment in product on a continuous basis.  Yes, it’s great to have that leverage on the delivery to the clients you’ve signed up, but you do have to continue to invest in your product as well.

Is your long-term strategy to remain profitable number two, or to knock off BGL and become number one?

We’re continuing to grow, we’re continuing to take market share from BGL.  Over nearly 60% of our market share comes from BGL and a good portion of the clients that we have signed up have come from BGL.  Picking up a business from them is our sort of continued focus in the SMSF space.  It is just one of those things where it is a slower process than a, go out there and kind of sign up half the market.  You just can’t get the accounting industry to move in that way.  We’ll keep chipping away there and building up that market share.  The other focus we have, obviously, being a listed company, one of the things we have to do is map out what the future looks like five years out? 

And say, well where’s our focus in five years’ time if we keep winning market share?  If we get to a 40-50-60% market share, we’ve still got this sort of defined market that we’re in in Australia.  What do we do outside of that?  For us, the focus at the moment is on that second horizon of, what do we do outside of the SMSF space and we’re looking with the Class portfolio product, with what do we do with family trusts and other investments outside of the SMSF space.  With the super reforms really limiting what you can put into super now, there are for high net-worth individuals more concerns about what do they do outside of super.  Not just kind of push as much into super as you can.  You do that and then what do you do?  Is the next focal area.

Well, I’d like to get onto that in a moment.  But for the moment, just focusing on Super, it sounds a bit like you think you can get more than 40% market share perhaps in five years’ time or whatever, is that right?  Is that what you think? 

Yeah, we think over the next couple of years that the remaining market share – there’s a technology adoption curve and we’re kind of past the early adopters and the innovators and we’re really into the mainstream market.  That market over the next couple of years will move to the cloud, they need to move to the cloud.  The requirements in terms of regulations, reporting, the demands that clients have in terms of mobile access and so forth, means that over the next sort of two, three years, you’re going to see the remaining portion of the market move to the cloud and we expect to win a good portion of that.  We know that software we have is more efficient than what the competitors have.  We know our clients are growing faster. 

We get 20% of our funds just from organic growth, so existing clients actually growing faster than their peers.  They’re winning funds from their competitors in the accounting space, they’re picking up business from firms that aren’t specialising in the SMSF space.  Even just that organic growth will help us add to our market share.  We see the rest of those kind of firms kind of moving.  Once everyone is in the cloud, then it will come down to who’s got the more efficient product.  We get a growing portion of our new business actually coming from people who are already using SuperMate or already using the BGL cloud product as well, people who’ve moved to the cloud but aren’t then necessarily seeing the efficiency from the product.

We’ve got quite a different take to our competitors in terms of how we automate the accounting and it really makes a big difference in terms of how data feeds are processed and the efficiency the practice gets.  

Do you think you’ll have to bring your price down?  I mean, that 30% differential is quite a lot.  Are you saying that the market’s not very price sensitive?

Accountants are very price sensitive.  I think what it means is you have to explain to them, how much time – I mean generally, what we go through is an exercise to say, how much time would I have to save you to earn that money back in staff costs.  That’s really the key differentiator.  The fact that we are so much more efficient means that you can have your SMSF staff looking after more funds than they would be looking after otherwise.  That means you can grow your practice and that is really what a lot of accountants are really challenged with at the moment is, where do they grow their practice. 

With the advent of sort of small business accounting and automation from the ATO and so-forth, as an accounting firm you’re looking to become a business adviser or you’re happy to get more involved in areas like SMSF and financial advice if you’re going to grow your practice.  SMSF is a fantastic area for accountants to grow their practice, being more efficient at it and being able to take on more work in that space, being experts in that is a great space for accountants to focus on.

You’re talking about in five years’ time, being in other areas, in other services than SMSFs and super.  If you’re going to do that you’d have to start building platforms pretty much now.  What are you building?

We’ve got the Class Portfolio product, we’ve got around about 6,000 accounts that are already using that.  About a third of our SMSF clients are using that product at this stage…

Kevin, what is that product, or how does it work?

It’s Class Portfolio, and what it does is it basically takes the same kind of accounting engine that we have that looks after the data feeds, the general ledger, the tax reporting, the investment reporting income and so forth that we have for the SMSF, and it basically provides the same capability for family trusts or for directly held investments.  It allows you to then also consolidate that so you can have a view for a household and say, what is your net-worth, where are the assets, what are the incomes that you’re getting across, who are the beneficiaries?  It really allows particularly those accounting firms who are looking at wealth accounting as a strategy, looking at working with, particularly their clients that have enough in their self-managed super fund, but then we’ve got money outside the self-managed super which is being held within family trusts or within companies that they’re investing through and really structuring that and dealing with the accounting for that and dealing with the beneficiaries of that and giving them a kind of a whole of wealth view of what’s going on for that family situation. 

Some people talk about it in terms of a family office style service that allows the accountant to help the household with managing their investments both in and outside of super.

Are you using the Class Portfolio service as an upsell to the super thing?  And if so, what percentage of your SMSF clients are using the portfolio?

Yeah, we are.  We go back to the accounting practices that are already using Class Super and we’re basically saying to them to look at what they’re doing in this space, obviously build out what they’re doing in the super space, but also to broaden what they’re doing into the trust and other areas.  It’s still relatively early days on that, so we’ve got to continue to refine that product and build it out.  But about just over 30% of the firms that are using Class Super, are now using the Class Portfolio product, albeit in smaller numbers at this stage. 

And what do you charge for the Portfolio product?

The Portfolio product is an annual fee of $150 as a headline rate.  Again, the same sort of volume discounting comes down.  It’s cheaper than the Super product at this stage, largely because it doesn’t have the same sort of compliance overlay and complexity that the Super fund product has.

Have you got any other gleams in your eye for future extra products, possibly even outside the accounting profession?

We do.  We’re looking more and more about how we engage with the financial planner and the investor directly, as well as engaging with the accountant.  It’s still kind of, I guess, in adjacent markets around looking at what we can do to better service the investor and the financial planner, so it’s still around the sort of wealth accounting space, but more shifting towards what is it that we need to do to really connect the financial planner, the accountant and the investor with what they’re doing, and what sort of services do they need around that? 

Whether that’s things like Robo advice or whether it’s things related to other sort of investment products or even insurance and areas like that.  All the adjacencies around what we might be looking at in terms of the accounting and investment reporting, but also what other services would they need around that.  We’ve got a large partner network with over 76 partners who are basically in a range of areas and really looking at which of those it makes sense for us to go into those sort of adjacencies. 

The financial planners are all pretty much looked after with platforms like NetWealth, Hub24, Iress and the proprietary bank platforms as well, you’re going to be competing with them.

Yes, we work with them, actually.  We get data figs from all of those platform providers, Hub24, BT, NetWealth and so forth, and what we do is we really try to connect what the accountant’s doing with what the financial planner’s doing.  I think if you look at Hub24 and NetWealth and the other platform providers, really what they’re servicing is providing tools to the advisers to deliver what they’re doing in the same space as we’re in but really, delivering what the advisers need.  Whereas, we’re dealing with the accounting side.  I think what the industry needs to do going forward is really bring those together.  In a lot of cases today, you will find the financial advisers and the accountants are working in the same practice. 

They’re not necessarily working together well at the moment and what we’re trying to do is really – we can get the data feeds from the platform, it comes into Class, the accountant does the work that they need to do and then we’re now feeding that data out and into XPLAN, which is the financial planning tool that the majority of the market uses.  That allows them to do their SOAs and ROAs that they need to do for their clients and provide a more holistic service across both the accounting and the financial planning needs of those clients.

I think your biggest shareholder or one of your biggest shareholders is something called [Tronsell], do you know what that is?  Who is that?

One of the founders of the business, the Kibble Family, were early investors.  [Tronsell] will be one of their entities that, if you look at our registers a lot of self-managed super funds and family trusts that are holding the assets that were from those founder investors, so that would be one of the Kibble Family’s entities.  They hold, I think, 16% or maybe a bit more still in Class.

You’ve got some other fund managers in there of course, institutional investors as well as the Kibble Family, as you put it.  What are they in it for in the long term?  Are they looking for an exit?  Do you think at some point Class Super gets taken over by, I don’t know, one of the big platform providers or one of the banks?

I think one of the concerns that you have of being a listed company is obviously at any point that that’s something that could happen, that someone else may decide that you fit within their sort of portfolio of things they want to be doing.  As you say, we’re not listed at $7 billion dollars, so certainly there are firms that could take on an acquisition like that if it fitted within what they’re doing.  And obviously the board would have to look at any offer that came in like that.  Obviously we’re focused on building what we have to do as a business, what someone else may do in terms of where we might fit in their sort of view of the world is something that you consider as a board of a listed company, but it’s not something that kind of keeps us awake at night.

Fair enough.  Well, good to talk to you, Kevin.  Thank you very much for your time.

Terrific.  Thank you, Alan.

That was Kevin Bungard, CEO of Class Super.