No. of Recommendations: 10
I have owned Daily Journal for a few years now and have tried to monitor progress. The information is really quite limited but the impression I get and how I think about it is like this. Not sure if I’m right. Written for the perspective of someone learning about the company for the first time, which may not be the case.
The Daily Journal Corporation was this quality little company that was completely disrupted when the internet came along. But it had and has a culture that is interesting and some very talented individuals past and present.
The culture included all kinds of important qualities that have been useful in its modern era. They are trying to do good things. They are proud of their purpose and they are focused on working hard at building products customers need and interacting with customers in ways that customers appreciate. They are working on difficult problems; operate in an area useful to society; and are looking to the long term. There is probably an element of permanent and patient capital in the shareholder base. There is zero interest in promoting the stock price, or trying to get one over any stakeholders. They are simply trying to build products that customers find useful and over time, perhaps if they are successful, provide shareholders with a return that they would not have got if it had not been for the team at Daily Journal that have pivoted so dramatically from a publishing company into an interesting configurable software system business, with a balance sheet created by a very unusual individual who took the profits from the newspaper business and famously created significant capital out of almost nothing. The extremely conservative accounting is another part of the culture that has passed from the previous managers to the current and is attractive to shareholders interested in the long term.
There are no guarantees how the company plays out over the next 20 years but it’s perhaps not completely delusional to consider that the culture is important and useful.
The capital is useful. It has helped sign up new clients: financial strength, longevity, the unusual practice of billing after go live! It provides investment income. Importantly, it provides shareholders with a backstop of capital that would be returned without being stolen by management, in the unlikely event that the Journal Technology venture turned out to be a complete bust. And now in the AI age, the company has the ability to acquire other companies if the CEO thought they had products that could not be developed in-house as well or quickly enough, that were useful to customers and the price made sense.
If you track the revenues of Journal Technology you can see clear and consistent progress with both recurring revenue growth and go live revenues continuing to show up.
People inside the company and customers would have a clearer view on the software position and trajectory but there isn’t much information for shareholders. It’s hugely important in considering how the company might look ten years from now. Management have talked about technical debt in the past. They have a mix of clients that demand on premises hosting and others that want cloud and have been migrated into that. Obviously there have been two major dynamics introduced in the last few years as AI tools change how they execute and how the new CEO drives the software business.
We know the customer base for Journal Technology have useful characteristics that shareholders might like. Complex and diverse requirements wrapped up in almost impenetrable bureaucracy that make the process of signing them for a digitisation journey challenging, helping to keep competitors away. The opposite end of the software spectrum to scale and standardisation. They also value cybersecurity, accuracy and data protection. That’s not to say that some future AI machine can’t completely eat their lunch but perhaps it less likely than some other software products and almost certainly would take longer.
The new CEO is in place for a couple of years now and it appears to be going very well, given the extraordinary external developments with AI and the legacy challenges he has inherited. One of the company’s traits under previous management was to control costs and try to make money. Not surprisingly for a publisher with Charlie Munger as chairman but Journal Technology needs a different approach and the new CEO appears to be correctly, I think, focused on improving the software offerings faster and growing the customer base. We can see that top line progress but FCF is currently low. The CEO has said that to make this work well you want to scale up as much as you safely can, to spread the development costs over a larger customer base. That makes sense and I support the idea of spending money today to build a higher margin business first the future. We know the CEO has built a successful software business before. He greatly admired Charlie Munger and Charlie would be proud but not surprised at what is being achieved and how it is being achieved.
Bringing it all together from an investment perspective. You have the buckets of value as described by Bill, who does a great job with reverse engineering the common stock positions. Journal Technology is only a portion of the company’s intrinsic value currently. The investments will each have their own journey over the next decade but they have been picked by a very thoughtful investor and it’s likely that, as a group, they will do well and the main energy of the company is of course going into Journal Technology. How will that play out we don’t know for sure. Lots of attractive dynamics including a new impressive leader and operator. It’s sticky and Charlie has said it’s a big market to go after. No guarantees and for an uninformed remote investor, the AI changes are probably an advantage (tools to move faster and at a lower cost) but are also a threat. It’s probably not an investment most people would consider attractive, as it could take quite a long time to develop. I like the culture, the management and am happy to watch patiently from a distance and be associated (in my mind only) with some high class people and see what happens.
I haven’t looked at the valuation recently but if I was looking at it now, I would look at the individual investments, their earnings and potential and would value Journal Technology on the basis of a future potential value based on a much larger turnover and a decent operating profit margin, that is fitting for a software business, once they move out a few years and are in the harvest period. That margin would reflect Munger’s comment that this is kind of a hybrid between consulting and software.
From a quick look at the results published on Friday. YoY Q1:
1. Licensing & maintenance fees up 13.7%
2. Other public service fees up 32%
3. Consulting fees up 84%
1 and 2 are recurring revenues and continue to show healthy system growth.
3 are the lumpy go live revenues that feed into 1 and 2.
Latest results and comments from CEO:
“Journal Technologies delivered strong revenue growth in the second quarter, with total JTI revenue increasing 32% year over year, reflecting continued expansion of e-filing and public service fees, higher recurring license and maintenance revenues, and increased consulting activity,” said Steven Myhill-Jones, Chairman of the Board and Chief Executive Officer of Daily Journal Corporation. “For the first half of fiscal 2026, JTI revenue grew 22% over the prior-year period. Income from operations improved significantly in both the quarter and the first half, reflecting the operating leverage in our technology business as it continues to scale.”
EVBIGMACMEAL
