No. of Recommendations: 5
Hello, I recently read the Daily Journal 2024 and 2023 annual reports and was wondering if any of you Berkshire shareholders here own and follow it?
My questions are:
Have you seen the software and how does it compare to their bigger competitor?
Have you heard anything from customers, or employees about the software?
Can a small software company compete long term against bigger rivals. who can recruit better engineers and enjoy the scale benefits from having more customers?
It seems really challenging for Journal Technology, however they seems to be moving forward as outlined below. Charlie has previously said the complex nature of these projects dealing with big bureaucracies with sometimes bespoke requirements makes this a bit like a consulting business like PWC and Journal Technologies is winning customers and bigger players may not be as flexible at making it work for clients.
Well known to anyone who follows the Daily Journal these are comments on the investment opportunity and current trading.
You have a market cap made up of a concentrated equity portfolio selected by the late Charlie Munger. It’s a handful of US banks, Alibaba, BYD (if not fully sold). The equity portfolio makes up call it 70 or 80% of the market capitalisation. That provides an interesting down side protection not available in many companies. (The equity portfolio was trimmed in 2024 and Charlie’s margin loan was reduced. Alibaba is doing well of late with its AI tie up with Apple and BYD is making progress with autonomous driving. But I’m not sure how much BYD DJCO still holds. It does still hold BABA.)
The remaining value is in the famous venture capital type software business Journal Technology. There is a very large total addressable market and a long growth runway. It’s high return on capital.
Working from memory and imprecise numbers, Journal Technology has recurring licensing type revenue of around $40m and you are currently paying around 4X that revenue. That recurring revenue is growing rapidly at around 20%. This is probably the only indicator I personally have, that this is a potentially good business. I’d like to know more about the software and how it’s viewed and developing. This might well destroy the investment thesis as more is learned.
Journal Technology famously does not charge customers an implementation fee until project go live. Implementation costs are expensed as incurred. Projects probably take 2 to 4 years to complete, or longer so there is an amount of potential implementation revenue and cashflow waiting for go live and billing. We don’t know the size of this well of unbilled income and it’s maybe not that important in itself, compared to the recurring licensing income and scale benefits that it may lead to.
Interestingly this implementation income is volatile over arbitrary 12 month periods. In 2023 there was a big increase and in 2024 there was a big decline. We hope it’s lumpy and not just declining. The company also told its customers around covid time that it was discontinuing support of an older software platform and moving everyone to their more modern offerings. That is bound to have pushed some customers into the arms of their competitors and been a negative force on revenue.
It looks to me that the stock market got excited about the 2023 revenue growth, due largely to this lumpy go live revenue and then got more pessimistic when the same lumpy revenue declined in 2024. There is a potential insight here. The recurring license fee income is growing rapidly as noted above and is hidden within total revenues which are flat. And the growth has been depressed from the migration to the new platforms.
There is another major dynamic happening at Journal Technology. The new CEO is making changes. He is addressing previous concerns around not paying engineers enough and he is pushing hard and faster at improving the product experience for customers and future proofing it. Prior to the new CEO there may have been too much emphasis on keeping costs down. In my opinion the new CEO is doing the right thing. Build it, delight customers and spend the money to get it done fast while the opportunity to digitise and modernise these difficult bureaucracies is still open. But that comes at a cost and that can be seen in the 2014 operating cashflows which are essentially zero. But remember, they are expensing all implementation costs as incurred, during this roll out phase, so the underlying free cashflow is not zero and will not be zero in the future when the market is fully saturated.
Mathew Peterson who follows the company closely, thinks the recurring license fee revenues can get to $100m by 2030 (currently $40m). That is another question I have for you. What operating profit margin would a business like this make long term? I’m thinking 30%, or something given the stickiness of the customer base, previously referred to by Charlie.
The new CEO had made noises about how he might use the capital created by Charlie Munger and cautiously mentioned acquisitions. Personally that would be a turn off for me but it would of course depend on what the bought and what they paid. I’m hoping they don’t do a large acquisition.
Anyway, my questions above are around any information you might have seen that from customers, employees etc about the quality of the software. Or if you can suggest any places to look. I will reach out to Matthew Peterson and see if he would comment further. I know from experience with these types of configurable software platforms that there is a very mixed bag of offerings and clearly it is fundamental to an investment in DJCO that they are on a path to delighting customers…
Any assistance would be much appreciated.
Best wishes
EVBIGMACMEAL, (DJCO shareholder for about 4 years and considering buying more. Aware of my Munger liking and authority bias and the dangers in that in this situation and therefore correctly looking to scuttlebutt and destroy the investment thesis!)
