Is SME sentiment turning a corner?
So says Clive Rabie, the CEO of accounting software company Reckon, which has annual revenues of $91.3 million.
Rabie says 2012 has got off to a good start with signs that small business is feeling more optimistic.
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For starters, there are more businesses being registered. SMEs are also opening the purse strings for software upgrades, after sitting quiet for the past couple of years.
Rabie also delivers a positive prognosis on professional services firms, tips a fall in the Australian dollar and dismisses speculation that his business will be sold to US partner Intuit.
We’re interested in hearing about business confidence. What’s your understanding of where it’s at?
There are a few things within our business that might give some indication.
The first thing is taking a look at the amount of new companies that are registered every year. Looking at 2012, it appears to us that the registration of new companies is greater.
Now, often companies can be registered when people have self-managed super funds or trusts, or they might be registered to start new businesses.
So the feeling is that they are a little bit stronger than normal, and I don’t think that a lot of people are spending money on superannuation because super hasn’t been doing that well.
Okay, so business registrations are rising. What other indicators are there?
The next thing is that we have many small businesses that buy our software on a yearly basis. They usually go through a few-year cycle when they upgrade.
Now, last year we thought upgrades were quite slow or existing customers coming back to us to get our latest version of software was a little slow.
The reason [for that] would be because you just don’t want to spend the money – although the amount of money is not that big, it’s most probably $400 to $500 a year, but it’s an investment nonetheless. This year it has definitely been a lot stronger and the renewal and the upgrades of software have been better than the past years. So that might mean that small businesses are spending some money.
When you say past years, how many years are you referring to?
Definitely 2011 and the latter part of 2010.
And why do you think this is?
We’ve done a fair bit of work to try and understand it. We just believe there is a little bit more momentum or quite possibly we could be doing a better job than our competitors and therefore we’re getting a bit of their market share, but that doesn’t tend to be the case.
We tend to move very slowly between growth in market share between us and, let’s say, [major rival] MYOB.
So I tend to say that last year people were slow to upgrade, but this year a bigger percentage are upgrading, so therefore small businesses are spending a little bit more money.
So how many businesses are you referring to through January and February?
We most probably would be registering about 15,000 in that time and, yes, so that rate has increased.
So you expect Reckon to improve on last year’s performance then?
We were up against a couple of headwinds last year in terms of retail.
Retail has been reducing in our industry both here and in America for the last four or five years. But the reduction in retail might be running at 6% or 7% each year, but that doesn’t mean that retailers have been behaving accordingly.
If you go back two years, our retail was down 30%, and then, for no good reason, our retail was up 30% the next year, and then last year our retail was down again 30%.
So the behaviour of retailers was not consistent with the sell-through, but on average the amount of product being sold through retail has reduced year on year in Australia and in the US.
I know the US because I spoke to them recently about it and that’s been consistent, but it does not mean less new accounting software has been bought.
A lot more people are buying and subscribing and going online than they did in the past. Therefore I think it really is a movement from buying software in retail, and therefore having desktop software, to moving to online software.
So it’s actually not a net loss, it’s just a movement?
Correct, it’s just a change in behaviour.
What percentage of your sales would be online?
Now we would most probably have about 15% of all our subscribers online, and that’s by far the fastest growing.
Does this means higher margins for your business?
Well, no. What it does mean is more consistent revenue.
The behaviour of small businesses is that they upgrade intermittently. So, one year, they might upgrade because they’ve got $400 lying around and then they spend the money. The following year they might be a little bit nervous, they might not have the money, they might say, ‘hey, we can hang on for another year’.
When you go into a subscription-type of product, you are upgrading or spending money with us every single year.
So, from our point of view, we might have 300,000 or 400,000 or 500,000 small businesses that use our software, but only 100,000 of them might be dealing with us on a year-by-year basis because they upgrade every four years.
A perfect example is my wife. She is a speech pathologist and audiologist and she’s had one product that she uses for years and years and never changes because she’s just petrified that she’s got to learn something new.
What a terrible customer.
Unfortunately it’s true. She’s my worst kind of customer. So what goes with that is if you take away that ability to buy a product and use it forever and not pay because you’ve bought the full licence and that goes away, then people subscribe.
And that means that whoever is using our software is paying us yearly and quite honestly it’s the right way because we’ll then give them free upgrades and we invest money into the software every single year and then they will be on the latest version on a yearly basis.
Can you talk us through your other business segments?
We have practice management software that goes to accountants that they use to run their practices. The majority of our software within accounting firms is a compliance type of software.
We do get affected by the amount of accountants that work at different firms. We find bigger firms tend to grow a bit faster in these times than smaller firms. We’ve had fairly consistent growth and we’ve had a fairly good time as we’ve gone through the last couple of years. Bigger firms also tend to buy the smaller firms and consolidate over time.
And then the other business that we do is a company that runs out of the UK and the US, they look after lawyers and what they do is cost recovery and expense management of legal firms predominantly.
For example, a lawyer wants to charge for all his time and he times when the conversation starts and when it ends and he allocates it to a client and he charges for his advice.
As you can imagine, most of that used to go, in the old days, on photocopiers and typing pools. But as more and more people talk on mobile phones and take phone calls while they’re walking out on the streets or on the beach on the Saturday morning giving advice, they want to be able to charge for that and so we have software that monitors those things.
So it sounds like you’re fairly confident about the outlook for professional services?
Yes, the nice thing is we don’t tend to lose customers. The other side of it is we tend to add customers; we have slight CPI increases from year to year so we have consistent but stable growth.
But it’s not as if we look at massive percentages because the majority of our customers are on recurring revenue or on a monthly cost and, because they only have a CPI increase, the majority of our revenue only increases by 3%.
There was speculation earlier this year that Reckon was talking about selling to Intuit. Was that true?
No, that’s absolutely nonsense and speculation and that was quite irritating and frustrating when those things came up because it just came from absolutely nowhere.
So how did that first come about?
What I think is that Intuit talk about a worldwide strategy. Whereas in the past, Intuit was always a company that was predominantly in the US and had us as partners in Australia, now they’re talking about being a world company with presence in all parts of world.
Our company’s a little bit different to what Intuit does, so it just, to me, doesn’t make sense that Intuit would be interested in a company that sells corporate services or does practice management for accountants when they don’t do that sort of work.
How are you coping with the high dollar?
Well, we were affected. Both our US and UK business was affected over there, our New Zealand business was affected over there.
But it’s kind of funny because it’s not really real money; it’s kind of they convert the value of the sales and everything on a particular day, but most of your money stays in the different countries, and really it only gets affected on the day that you do convert it.
So, for me, it just feels like there is an upside when the Australian currency get weaker and the other currencies get stronger, so it just tends to go up and down like a yo-yo.
Are you expecting the dollar to fall this year though?
Well, that’s what the numbers we’ve got or what we’ve used on our budgets say, but only slightly.
So, about a dollar?
Yes, I think it’s a dollar, maybe very, very high nineties.