RKN: Software Dual-Segment — Cash Cow Funding Legal Gamble
RKN: Software Dual-Segment — Cash Cow Funding Legal Gamble
In a Nutshell
Executive Summary
In a Nutshell
Reckon provides accounting software to Australian SMEs (78% of revenue) and billing workflows to global law firms (22%). At A$0.53 vs fair value A$0.65, the stock offers 23% upside. The market prices legacy desktop decline without crediting Legal Group scaling potential (111% Billing Workflow growth, 12 of top 20 global law firms), while a mature subscription base generates A$7–9m annual free cash flow with 95% revenue visibility and a sustainable 4.7% dividend yield.
Investor Profiles
| Profile | Rating | Rationale |
|---|---|---|
| Income | ★★★★☆ | The 4.7% fully franked yield is covered 3.1 times by free cash flow—rare for an Australian micro-cap. The 95% subscription base provides reliable income visibility, with dividends growing modestly from 2.5 cents (FY26) to 3.0 cents (FY28). Low leverage (0.2x net debt/EBITDA) protects the dividend through downturns. |
| Value | ★★★★☆ | Trading at 7x post-development EBITDA vs an 8–10x peer range, the market implies near-zero growth and single-digit margins. Fair value of A$0.65 represents 23% upside with a margin of safety provided by A$8m annual free cash flow. The Cashflow Manager acquisition at 2.6x EBITDA demonstrates management's capital discipline, supporting further re-rating potential. |
| Growth | ★★☆☆☆ | Organic revenue growth of 3% reflects a mature installed base with limited expansion runway. The Business Group (78% of revenue) faces structural headwinds as legacy desktop users migrate or churn. Legal Group Billing Workflows grew 111% but contribute only A$1.4m ARR—too small to move the needle near-term despite 77,000 addressable attorneys. |
| Quality | ★★★☆☆ | Business quality scores 5.1/10—below average. The competitive moat (3.7/10) rests on switching costs that erode as Xero improves migration tools. ROIC of 22% is inflated by negative net tangible assets; replacement-cost ROIC is 13%. Management credibility is 6.6/10—sensible strategy execution but limited innovation vision and no disclosed AI roadmap. |
| Thematic | ★★☆☆☆ | The cloud migration trend is mature, not emerging. No exposure to secular tailwinds like AI integration (strategy undisclosed) or global SaaS expansion. The Legal Group offers niche exposure to law firm workflow digitisation, but at 3.4% market penetration and A$13.8m revenue, this remains pre-scale with uncertain commercialisation timeline. |
Best Fit: Income + Value Investors. The combination of reliable 4.7% yield with 23% upside to fair value suits investors seeking defensive cash flow with modest capital appreciation. The subscription base provides downside protection while Legal Group optionality offers asymmetric upside. Not suitable for growth-focused portfolios given 3% organic expansion and mature market positioning.
Executive Summary
Reckon operates two software businesses: a mature Business Group serving 100,000+ Australian SME accounting users, and an early-stage Legal Group targeting global law firm billing workflows. Revenue is 95% subscription-based, providing predictable cash generation. The Business Group (#3 in Australian accounting with 3% market share) extracts cash from a stable installed base, while the Legal Group scales specialist billing software deployed at 12 of the top 20 global law firms.
FY25 results were strong on the surface—revenue up 15% to A$62.4m, NPAT up 94% to A$7.4m—but this flattered reality. The Cashflow Manager acquisition contributed A$13.8m revenue at peak margins, while organic Business Group growth was modest at 4%. Legal Group Billing Workflows doubled revenue to A$1.4m, penetrating 3.4% of the 77,000-attorney addressable market. The core issue: Reckon One cloud users remained flat despite 29% ARPU growth, suggesting the migration from legacy desktop is repricing existing customers rather than expanding the base.
The investment case rests on stable Business Group cash flow (A$7–9m annual free cash flow) funding Legal Group optionality. Management has allocated capital sensibly—the Cashflow Manager deal at 2.6x EBITDA was immediately accretive—but faces structural headwinds from Xero's dominance (50% Australian market share) and rising development costs (A$15m annually, 24% of revenue). At A$0.53 vs fair value A$0.65, the stock is 23% undervalued.
Results & Outlook
What Happened?
FY25 revenue grew 15% to A$62.4m, driven by the Cashflow Manager acquisition (A$13.8m contribution) and 29% Reckon One ARPU growth as users migrated from legacy desktop. NPAT surged 94% to A$7.4m, but this included favourable one-offs. The critical detail: organic Business Group growth was 4%, and Reckon One user count remained flat—the revenue lift came from repricing, not volume expansion. Legal Group Billing Workflows grew 111% to A$1.4m ARR, securing deployments with 12 of the top 20 global law firms. Free cash flow jumped to A$8.7m, supporting a maintained 2.5-cent dividend (4.7% yield).
| Metric | FY24A | FY25A | FY26E | FY27E |
|---|---|---|---|---|
| Revenue (A$m) | 54.1 | 62.4 | 65.4 | 68.6 |
| EBITDA Margin (%) | 37.3 | 41.8 | 38.4 | 38.9 |
| Post-dev EBITDA (A$m) | 5.8 | 11.0 | 9.3 | 10.2 |
| EPS (cents) | 3.9 | 6.5 | 5.2 | 5.8 |
| FCF per Share (cents) | 3.0 | 7.7 | 6.4 | 7.0 |
| DPS (cents) | 2.5 | 2.5 | 2.5 | 2.75 |
What's Next?
FY26 faces margin normalisation as Cashflow Manager's peak contribution fades and employee costs grow 4%. EBITDA margins compress from 42% to 38%, while post-development margins fall from 18% to 14% as A$15m annual development spending (non-discretionary for product maintenance) grows with inflation. Revenue growth decelerates to 5% as organic Business Group expansion moderates to 2–3%—the structural ceiling for a #3 player in a mature market dominated by Xero.
The catalyst roadmap centres on Legal Group scaling evidence. H1 FY26 results (August 2026) will reveal whether Billing Workflow ARR is tracking toward A$5m (scaling proof) or stalling at current penetration. Business Group organic growth turning negative would invalidate the cash generation thesis, while sustained user count growth would confirm migration momentum. Near-term, dividend sustainability (3.1x covered) provides a 4.7% income floor regardless of growth trajectory.
Valuation & Risks
| Metric | Value |
|---|---|
| Fair Value | A$0.65 |
| Current Price | A$0.53 |
| Upside to Fair Value | +23% |
| Fair Value Range | A$0.44 – A$0.78 |
| Implied 3-Year Return | ~7% p.a. (incl. dividends) |
What Could Go Wrong?
The single biggest risk is legacy migration churn accelerating (30% probability). Reckon One users are flat despite 29% ARPU growth—suggesting the cloud migration is repricing existing customers, not converting new ones. If legacy desktop users defect to Xero or MYOB rather than upgrading to Reckon One, Business Group revenue turns negative. This would compress free cash flow by A$3–4m annually, threatening dividend sustainability and eliminating the funding source for Legal Group investment. The market already prices this risk—current valuation implies near-zero terminal growth and 9% margins, consistent with our Bear case (25% probability, fair value A$0.44). A confirming signal would be two consecutive halves of negative Business Group organic growth, which would reduce fair value by A$0.08–0.12 to A$0.53–0.57.
Development cost inflation (35% probability) amplifies this risk. Annual development spending of A$15m (24% of revenue) is structurally non-discretionary—required to maintain product competitiveness and compliance features. Australian and US tech talent costs are rising 4–5% annually. Without matching revenue growth, each percentage point of wage inflation above forecast compresses post-development margins by 0.4 percentage points, eroding the A$7–9m free cash flow base that underpins both the dividend and Legal Group optionality.