Monty Swift

mswift@taylorcollison.com.au
+612 9210 1381
www.taylorcollison.com.au

29 November 2023
Reckon Limited (RKN)

Initiating Coverage – Overlooked Value and Poised for US Growth Recommendation: Outperform
Our view Summary (AUD)
RKN is a software business offering accounting solutions for domestic SMEs and Market Capitalisation $62m
legal practice workflows in the lucrative US/UK market. Following the $100m sale of Share price $0.55
RKN’s APS Group for more than its market cap in August 2022, we think the market 52 week low $0.40
is undervaluing the remaining Business and Legal Groups. Currently trading on 52 week high $0.675
FY23e EV/EBITDA and PE multiples of 3.2x (76% discount to peers) and 11.8x
respectively, we believe an opportunity exists for investors in the nQueue Zebraworks Share price graph (AUD)
(Legal Group) software as it consolidates and grows its US customers. Additional and
unique management incentive structures now in place emphasise to investors that
RKN will remain focused on extracting maximum value for shareholders in
conjunction with accretive product development. We initiate coverage on RKN with
an Outperform recommendation.

Key points
Accounting software generating meaningful cash – The Business Group is
producing ~$12.4m of annualised operational cash flow including its development
spend. Further, we estimate RKN will generate $8.9m in free cash flow excluding
development spend on Legal in FY23, at an attractive ~7.2x to EV. This highlights the
optionality and margin of safety investors receive from the strong cashflow the
Business Group makes. Although we separate the two for illustrative purposes, we
see the Legal Group as an integral growth avenue.
Legal - a gem in the making – With top tier customers, a highly experienced US-
based team and a track record selling similar large businesses, we believe there is a Key Financials (AUD)
material opportunity ahead for RKN. Double-digit subscription revenue growth, FY22A FY23E FY24E
EBITDA breakeven and two and half years on from the Zebraworks acquisitions Revenue ($m) 51.2 53.9 56.8
indicates Legal is in an exciting phase. In addition to the Core back-office offering, we EBITDA ($m) 18.0 20.4 22.2
see the high value modules such as BillingQ and as DataQ as key growth products EBIT ($m) 4.8 6.3 7.9
in newly emerging markets for Legal. NPAT adj. ($m) 3.6 5.3 5.8
Shareholder value track record – Management remuneration has been clearly PE Ratio (x) 17.4 11.8 10.8
aligned with generating significant shareholder value through the potential sale of its EPS (cents) 3.2 4.7 5.1

Legal and Business groups. Material incentives are in place for management if they
EV/EBITDA (x) 3.5 3.2 2.8
reach TSR of between $150m-$300m. We believe these metrics are not unachievable
EV/EBIT (x) 13.0 10.2 8.0
when conservatively summing the parts of both businesses which provides for around
EBITDA margin
2-4x upside from RKN’s current market cap. (%)
35% 38% 39%

Material discount to peers – RKN, as a fully profitable business, stands above many
of its loss making micro-to-small cap software peers. We believe this has not been
fully appreciated by investors given it trades at an FY24e P/E discount of 61% to
relative peers after excluding larger competitors Xero (ASX:XRO) and Intuit
(NASDAQ:INTU). While we appreciate the Business Group in Australia is relatively
mature, we believe the discount is unwarranted considering Legal’s growth prospects
and the recurring revenue of both segments.
Migration to cloud unlocks sale value – There is a current trade sale restriction in
place due to historic code used in RKN’s traditional Accounts and Hosted software:
RKN is currently migrating customers to its cloud-based Reckon One platform. A
successful transfer of customers and further development of Reckon One would
unlock significant value as a potential M&A target. Although we see some risk in
further developing Reckon One to be as feature rich as the traditional desktop version,
we take comfort in the fact this it is already a well-developed and crucial tool for small
businesses.
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Reckon Limited (RKN)
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R e c k o n ( R KN ) - S um m a ry o f F o re c a s t s $ 0 .5 5

P R O F IT & LO S S S UM M A R Y ( A $ m ) B A LA N C E S H E E T S UM M A R Y

Y e a r e nd D e c e m be r ( c o nt . o ps ) F Y22A 1H 2 3 A F Y23E F Y24E F Y25E Y e a r e nd D e c e m be r F Y22A 1H 2 3 A F Y23E F Y24E F Y25E

T o t a l R e v e nue 5 1.2 2 8 .2 5 3 .9 5 6 .8 5 9 .9 Cash and cash equivalents 1.2 1.1 1.1 2.8 3.1

EB ITDA 18.0 11.0 20.4 22.2 24.0 Trade and o ther receivables 1.9 1.8 1.6 1.7 1.8

Dep'n/Other A mo rt'n (13.1) (6.8) (14.1) (14.3) (14.2) Invento ries 0.3 0.3 0.3 0.3 0.3

EB IT 4.8 4.3 6.3 7.9 9.8 Other 1.4 1.7 1.7 1.7 1.7

Net Interest (0.1) (0.1) (0.2) (0.2) (0.1) To tal Current A ssets 5.0 4.8 4.6 6.4 6.9

P re-Tax P ro fit 4.8 4.1 6.1 7.7 9.7 Trade and o ther receivables 0.1 0.6 0.6 0.6 0.6

Tax Expense (1.2) (0.3) (0.8) (1.9) (2.4) PPE 0.7 0.6 0.5 0.7 0.8

N P A T ( a dj) 3 .6 3 .8 5 .3 5 .8 7 .3 Intangibles 31.0 32.1 32.6 34.0 35.6

A bno rmals 53.2 0.0 0.0 0.0 0.0 Right o f use assets 2.0 1.5 1.0 1.6 1.6

NP A T repo rted (co nt. and disco nt. o ps) 56.8 3.8 5.3 5.8 7.3 Other 1.1 1.6 1.6 1.6 1.6

To tal no n-current assets 35.0 36.3 36.3 38.4 40.1

M argins o n Sales Revenues T o tal A ssets 3 9 .9 4 1.2 4 1.0 4 4 .8 4 6 .9

EB ITDA 35% 39% 38% 39% 40% P ayables 3.3 3.5 3.4 3.6 3.7

EB IT 9% 15% 12% 14% 16% P ro visio ns 1.9 2.0 2.0 2.1 2.2

NP A T 7% 14% 10% 10% 12% Co ntract liabilities 5.8 5.8 5.8 5.8 5.9

Lease liabilities 1.1 1.1 1.1 1.1 1.1

Change o n P CP Other 0.3 0.5 0.5 0.5 0.5

To tal Revenue 3% 4% 5% 5% 5% To tal Current Liabilities 12.5 12.9 12.8 13.1 13.4

EB ITDA 4% 3% 14% 9% 8% Trade and o ther payables 0.3 0.3 0.3 0.3 0.3

EB IT (18%) (5%) 30% 25% 24% B o rro wings 4.1 1.4 3.1 3.4 1.4

NP A T (36%) 16% 48% 9% 26% Co ntract liabilities 1.3 1.5 1.5 1.5 1.1

Lease liabilities 1.3 0.8 0.2 0.6 0.5

P ER SH A R E D A T A Other 2.6 2.9 2.9 2.9 2.9

Y e a r e nd D e c e m be r ( c o nt . o ps ) F Y22A 1H 2 3 A F Y23E F Y24E F Y25E To tal no n-current liabilities 9.6 6.8 7.9 8.6 6.1

E P S A dj. ( c ) 3 .2 3 .4 4 .7 5 .1 6 .4 T o t a l lia bilit ie s 2 2 .0 19 .7 2 0 .8 2 1.7 19 .5

Gro wth (pcp) (36%) 16% 48% 9% 26% N et A ssets 17 .9 2 1.5 2 0 .2 2 3 .1 2 7 .4

Dividend (c) 60.0 2.5 2.5 2.5 2.6 E quit y 17 .9 2 1.5 2 0 .2 2 3 .1 2 7 .4

Dividend yield (%) 109.1% 4.5% 4.5% 4.5% 4.7%

Operating CF per Share (c) 6.8 3.3 4.8 5.0 5.9 C A S H F LO W S UM M A R Y

Y e a r e nd D e c e m be r F Y22A 1H 2 3 A F Y23E F Y24E F Y25E

KE Y R A T IO S NP AT 56.8 3.8 5.3 5.8 7.3

Y e a r e nd D e c e m be r ( c o nt . o ps ) F Y22A 1H 2 3 A F Y23E F Y24E F Y25E No n Cash Items (51.1) (0.0) 0.0 (0.3) (0.4)

Current ratio (x) 0.4 0.4 0.4 0.5 0.5 Change in Wo rking Capital 2.0 0.0 0.1 0.2 (0.2)

ROE (%) 20% n/a 26% 25% 26% O pe ra t ing C a s hf lo w 7 .7 3 .8 5 .5 5 .7 6 .7

Net interest EB IT co verage 67.1 34.9 34.1 48.8 95.3 P ayments fo r P P E (0.2) (0.1) (0.1) (0.3) (0.3)

Lease payments (1.6) (0.6) (1.2) (1.1) (1.1)

V A LUA T IO N M ULT IP LE S F re e C a s hf lo ws 5 .8 3 .1 4 .2 4 .3 5 .3

Y e a r e nd D e c e m be r ( c o nt . o ps ) F Y22A 1H 2 3 A F Y23E F Y24E F Y24E P ro ceeds fro m sale o f business 78.4 (0.8) (0.8) 0.0 0.0
Drawdo wn / (Repayment) o f
P E R a t io a dj. ( x) 17.4 n/a 11.8 10.8 8.6 (12.1) (2.7) (1.0) 0.3 (2.0)
bo rro wings
EV/EB ITDA (x) 3.5 n/a 3.2 2.8 2.5 Other (2.0) 0.2 0.2 0.0 0.0

EV/EB IT (x) 13.0 n/a 10.2 8.0 6.2 Dividends paid (70.2) 0.0 (2.8) (2.8) (2.9)

FCF Yield (%) 9% n/a 7% 7% 8% N e t C a s hf lo ws ( 0 .1) ( 0 .1) ( 0 .2 ) 1.7 0 .4

Net cash / (debt) (2.8) (0.3) (2.1) (0.6) 1.8

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 Reckon Limited (RKN)
29 November 2023

Contents Page

1. Company Overview and Background 4

2. Value Proposition and Drivers 5

3. Industry Overview and Competitors 7

4. Financials 8

5. Valuation 9

6. Investment Risks 10

Appendices

I. Other Business Group Information 11

II. Other Legal Group Information 11

III. Board and Management 12

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1. Company overview and background

RKN has been listed on the ASX since 1999 and has evolved into a business split into two clear segments:

• Business Group – Accounting and payroll software solutions targeting approximately three million small businesses
across Australia and New Zealand (1H23 Revenue: $22.5m – December year-end). Headcount of approximately
100.
• Legal Group – Legal practice management and workflow software targeting 500 large and 46,000 mid-size law firms
predominantly in the USA (1H23 Revenue: $5.7m). Headcount of approximately 60.

Prior to becoming a two segment operation, RKN sold its enterprise software division (APS) for $100m in August 2022. At the
time of announcement, the cash sale eclipsed its market capitalisation but only represented circa 30% of its revenue and 40%
of RKN’s EBITDA. As such we believe the market is underestimating the remaining two businesses, the “Business Group”
and “Legal Group”:

1. Business Group

The original RKN software was built on historical Intuit (INTU:US, competitor) codebase which we know as Reckon Accounts
and Reckon Accounts Hosted. This desktop accounting software is feature-rich and is used by small businesses in Australia
and New Zealand for:

• Bookkeeping • GST/BAS reporting

• Invoicing and quoting • Financial reporting
• Payroll • Timesheets
• Superannuation automation • Bank data feeds

Under the Intuit licence agreement, there are trade restrictions (i.e. divestment) in place which RKN must adhere to. This
restriction and the natural need to move to the cloud within the software industry has led to an acceleration of development
for Reckon One, the Company’s cloud-based accounting SaaS offering.

Product Split and Transformation Overview

Source: RKN presentation

2. Legal - nQ Zebraworks (nQZ)

nQZ provides practice management software and workflow solutions to legal firms predominantly in the US and UK for
document scanning and routing, print management and cost recovery solutions. The Legal Business entered its latest chapter
when RKN purchased 70% of US-based start-up Zebraworks in August 2020 (completed in Feb-21) under a funding
arrangement. Leveraging RKN’s software infrastructure and to accelerate development of new cloud-based products were
the clear value and growth drivers for management. Following a promising two-and-half years, RKN recently committed to
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increase its investment by US$3.5m along with minority holders, valuing the business at US$20m (~A$31.5m). It is important
to note that the nQ Zebraworks CEO also provided his pro-rata contribution of approximately US$400k. RKN’s investment
will be predominantly front-ended but staggered over 24 months funded by Business Group earnings.

The purpose of the funding is to scale up its sales team along with its go-to-market approach and take it to full cash flow
breakeven in FY25. We see the transaction as transformational in terms of the opportunity for expedited revenue
growth and access to an exceptionally established legal software team.

nQZ Product Overview (see Appendix I for product overviews)

Source: RKN presentation

Development Focus
The traditional ‘Core’ side (see figure above) will be moved to the cloud in due course but is not a priority for management.
The opportunity for revenue growth lies within the ‘Platform’ and the development of new modules to build on its ~15.1%
revenue CAGR across the previous two years. Platform which was born out of Zebraworks will benefit greatly from cross
selling its well-entrenched Core customers to the cloud products. This inlet and faster implementation time due to its on cloud
platform should compound this growth profile.

2. Value Proposition and Drivers

1. Migration to cloud unlocks sale value

RKN is at a pivotal stage, navigating its transition to the cloud with Reckon One and its gradual move away from its higher
ARPU and margin hosted/on-premises software. The latter is primarily utilised by accountants rather than small businesses
directly. Our conservative estimate places the number of actual cloud users on Reckon One and Mobile at a minimum of
65,000 excluding the Hosted numbers within the 109,000+ disclosed. These are all unique paying individuals. This figure is
juxtaposed against the backdrop of three million small businesses across Australia and New Zealand.

While there may be an inclination for management to expedite the migration of users to the cloud, we believe the company is
rightfully prioritising the generation of meaningful free cash flow until the timing for the transfer becomes optimal. An early
transition runs the risk of heightened churn if Reckon One's features prove underwhelming. However, we have confidence
this risk is mitigated given RKN's strong twenty-plus years of development expertise and capital allocation (i.e. the APS sale).
A complete migration positions the Business Group for third-party acquisition interest whilst also augmenting shareholder
value.

Material price increases feasible

We contend that Reckon One has the potential to implement annual price hikes of at least 10% in the short to medium term
without compromising its competitive pricing in the market. This proposition finds support in recent developments, notably
Xero’s raising of Standard monthly plan by 10% (from $59 to $65). This adjustment positions Xero's pricing at a 44% premium
over Reckon One. The significance of this price gap is accentuated further when considering Reckon One's unrestricted
payroll feature in contrast to Xero's limitation to two (refer to Appendix 1 for details). This places the Business Group in a
strong position to grow at above recent growth rates (1H23 Cloud Subscription Growth: 6%) by leveraging pricing without
impacting its pricing appeal.
Product Comparison Monthly Price ($)
Reckon One $45
Xero – Standard $65
Source: Xero, Reckon
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2. Legal Group growth and the opportunity

Proven addressable market with growth opportunities abundant
nQZ strategically targets the 500 largest law firms in the USA alongside approximately 46,000 mid-sized firms. Currently
servicing around 500 clients, equivalent to approximately 1% of the target market, nQZ boasts an impressive clientele
including six of the top ten global legal firms and eight out of the top twenty-five in the US. We identify this as a pivotal and
viable growth driver for RKN, given the substantial and still under-penetrated market. Moreover, there is significant potential
for further expansion within its existing client base, upselling from the original Core offering which represents the vast majority
of current revenue to the broader Platform.

Capturing market share strategically

nQZ is strategically positioned to gain market share by avoiding direct comparison with large ERP Systems. Instead, it serves
as an ancillary and ERP-agnostic product, delivering value to firms through enhanced practice efficiencies and cost recovery.
Our optimism in its ability to deliver growth is grounded in nQZ's design, specifically tailored as an add-on that seamlessly
integrates with major ERPs, such as ProLaw, which cater to medium-sized firms.

A notable trend we observe is the increasing preference among businesses for adopting specialised software solutions rather
than undertaking comprehensive IT infrastructure overhauls. This tendency is particularly pronounced in critical yet smaller
aspects of a business's ERP, such as billing and print/cost tracking. The shift provides nQZ with a compelling tailwind and a
distinctive selling point. The software's lower cost, lower risk, and minimal implementation time further solidify its
advantageous market offering.

Attractive price point

Agreements generally range between three to five years across its traditional and cloud offerings:
• Core: US$1,000/month or ~A$20k per year
• Platform: US$300/month or ~A$6k per year
Clio, a competitor, sells its most popular plan at A$149/month/user or what would be $45k/year assuming the average RKN
customer has 25 users. For firms spending considerably more on ERPs and other practice management software we see this
price as relatively on point compared to the alternative of overhauling IT infrastructure. Although we expect Platform may
move to a more typical SaaS style in the medium term, the lengthy contracts are also encouraging and highlight the value
customers attribute to it.

Experienced Legal Group CEO

Bill Bice brings a wealth of experience to the role of CEO, with a successful track record in legal software transactions.
Notably, he founded and led ProLaw until its acquisition by Thomson Reuters in 2001. Furthermore, he served as the CEO
of Exemplify, another legal software business, which was successfully sold to Bloomberg in 2016 for an undisclosed
amount. This extensive experience instils confidence in both the CEO and the broader management team, who collectively
possess significant expertise in the legal tech sector. Coupled with the outlined incentives designed to fuel growth (refer to
Section 3.3), these factors form a robust foundation for maximising shareholder value.

BillingQ and clipping the ticket?

In the medium term, we identify a potential revenue enhancement opportunity for nQZ through the BillingQ software. There
exists an opportunity for nQZ to potentially 'clip the ticket' when clients pay their invoices. While we do not currently incorporate
this upside in our forecasts, it is worthwhile noting that approximately 20 firms or 1,000 users are presently utilising the BillingQ
software, presenting a blue-sky growth prospect.
3. Incentive structures provide material encouragement for shareholder returns
Group management cash distribution
The recently implemented management incentive structure, devised by the Board, effectively outlines a medium-term wind-
down strategy for RKN. This structure is anchored in achieving a total shareholder return (TSR) ranging from $150 million to
$300 million or beyond. The TSR encompasses distributions, dividends, and consideration derived from any change of control
transaction, specifically the acquisition of 100% of RKN by a third party. Under this framework, the CEO and CFO stand to

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receive substantial cash distributions, with ceilings of up to $5.7 million and $1.2 million respectively, if the TSR surpasses
$300 million (refer to the table below). The arrangement structure serves as a significant incentive for the management team.
Shareholder Return Bands Cash Distribution - CEO Cash Distribution - CFO
Under $150m Award forfeited Award forfeited
$150m - $200m $0.8m $0.2m
$200m - $250m $1.3m $0.3m
$250m - $300m $2.6m $0.6m
$300m + $5.7m $1.2m

Legal management also aligned

In the event of the sale of nQZ for a value ranging from US$70 million to US$100 million, a unique provision is in place to
ensure alignment with the interests of the Legal Group's management. Specifically, a "top-up" mechanism will be activated,
providing additional securities to three out of the four members of the management team who did not partake in the March
US$4 million fundraising round. This arrangement ensures that, in the case of a US$100 million sale price, these managers
will be made whole as if they had participated to their full entitlement.
Considering the substantial cash quantum that would be required for them to exercise their entitlement, we view this outcome
as positive and also well-aligned with the interests of shareholders. This provision underscores the commitment to equitable
participation in the event of a significant transaction, reinforcing the shared goal of maximising shareholder value.
nQZ Potential Future Transaction Bands USD ($m) USD ($m) Maximum Total
Potential Transaction Price 70 - 100 100 - 200 -
Management Incentive (top end used) 2.17 3.75 5.92
Share of RKN’s Securities in nQZ Management Receive 2.85% 4.93% 7.78%

M&A valuation substantiation

Although the TSR bands can seem aggressive prima facie, we think when breaking down a future $180m or $300m valuation
as an example, it can be clearly substantiated using applicable and relatively conservative multiples:
Valuation
TSR ($180m) Multiple (x) $m Assumptions
($m)
Business 5x EBITDA 24.6 123 1H23 annualised
Legal 5x Subscription Revenue 11.4 57 1H23 annualised
Total 180
TSR ($300m)
Business 4x Subscription Revenue ~41 164 1H23 annualised
20% growth for 5-years and 1H23
Legal 5x Subscription Revenue ~27.4 137
annualised
Total 301

Comparable transactions
• RKN sold APS - a business which wasn’t growing revenue - in August 2022 for 4.6x FY21 revenue and 8.4x FY21
EBITDA
• MYOB was purchased by KKR in May 2019 for 5.1x FY18 revenue and 12.4x FY18 EBITDA
• RKN sold ReckonDocs for $13m in March 2021 for 2.6x FY20 revenue and 4.3x FY20 EBITDA1
Management’s track record of selling businesses shouldn’t be underestimated for a business that may come under M&A
scrutiny by both private equity and industry players. We believe the recurring nature of revenue and the ability to utilise the
large user numbers to leverage other products is attractive for these groups. As an ancillary product, nQZ also would have a
clear exit strategy for private equity to industry players such as ProLaw, Kofax or even Clio to bolster practice management
workflows. There is also precedent for Reckon One in terms of buyers outside of Xero, Inuit and MYOB: ANZ launched
takeover talks for MYOB in 2022 as they looked for further growth avenues outside the usual course of business.

1
FactSet data.
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3. Industry overview and competitors

Business Group
RKN competes with large multi-national players in its accounting software but has found a long-term position as a feature rich
desktop software and a low-cost alternative in Reckon One. Medium term, the Reckon One cloud product will continue to
compete on price (but with flexibility to increase), application features and access to real support for small businesses.

Competitors Australian Subscribers

Xero (ASX:XRO) 1.6m
MYOB (owned by PE firm KKR) 1.0m
QuickBooks (NASDAQ:INTU) 0.2m
Reckon 0.1m
Source: Xero company presentation, MYOB website, Australian Financial Review

With XRO’s pricing 45% above Reckon One at the base level and a focus
predominantly on overseas growth, we continue to see an opportunity for RKN to
acquire and retain customers at least in line with net new registered businesses in Australia. In FY23, there were 300,000
new businesses registered or an average of 80,000 net new across the previous four financial years. 2 Additionally we see
numerous opportunities to leverage its 109,000+ user base through 3rd party partnerships and other monetisation strategies
through its software and mobile app.

Legal
Kofax (unlisted, US) owned by private equity stands as the primary competitor for RKN’s Core offering. The newer Platform
competes with larger cloud platform providers such as Clio (unlisted, Canada) and legal focused FileVine (unlisted, US) which
concentrates on smaller firms. The legal document management software industry is expected to grow at 14.3% CAGR
between 2023 and 2030 from $1.9b to $4.7b.3 We see the growth profile in this segment for nQZ as substantial as legal
firms consistently look for efficiency gains in administration, billing and analytics without overhauling their entire ERP.

4. Financials
As it stands, Legal accounts for 38% of group headcount and contributes around 20% of revenue, a proportion we expect to
increase through its positive growth profile. We estimate group FY23 and FY24 earnings to be $5.3m and $5.8m.

2
Australian Bureau of Statistics (Jul2019-Jun2023), Counts of Australian Businesses, including Entries and Exits.
3
Legal Document Management Software Market Research Report, Zion Market Research.
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• Although user growth came off slightly in 2023, we highlight this was due to RKN discontinuing its free Single Touch
Payroll when it launched 2.0. We expect the conversion from non-paying to paid users to be all but complete.

Source: RKN and TC analysis and estimates

• Development spend – we forecast $5m and $2.3m 2H23 development spend for the Business and Legal groups
respectively with a similar profile in FY24 across each half. We see a margin of safety in the Business development
spend which includes Reckon Accounts. Once Reckon One is ‘fully’ developed and risk is mitigated for the migration,
there is potential for management to strategically reduce development spend on Reckon Accounts. This would then lead
to a substantial increase in cash flow directed back to shareholders.
• Funding nQZ – RKN has committed to funding US$3.5m over 24 months which is front-end loaded. With the Business
Group continuing to produce material FCF, we see the risk-reward opportunity as more than acceptable.
• Business Revenue Per User (RPU) – the Reckon Accounts/Hosted product is around $75/month compared to Reckon
One which is closer to the $45-$55. Although the price of Reckon One can reach $72/month, the current disparity is more
material as it continues to develop products and be skewed lower from the more basic packages and Single Touch
Payroll (table below). We estimate ARPU to be around $15/month with considerable room to grow. At a high level,
accountants use the higher RPU, more feature rich Accounts product whereas small businesses (around 3-4 employees)
use Reckon One.
Reckon One – Pricing per month
The Basics Essentials Essentials + Payroll Premium All Modules
$12 $33 $45 $63 $72

• Subscription revenue – in 1H23 subscription revenue made up more than 90% of total revenue showcasing the strong
recurring nature of income. Legal subscription revenue grew 13% constant currency versus pcp and Business grew 3%.
• Earnings leverage to come – as Legal transitions into a profitable business, we expect a step-change to occur in Group
margin (FY23: 37%) which has been subdued (FY23 segment EBITDA margin – Business: 60%, Legal: 4%).
• Dividend – we expect the annual dividend payout ratio to be around 50-70% of NPAT and be partially funded by debt.
We estimate the dividend to remain steady next year at 2.5cps as the Legal Group continues to grow.

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5. Valuation
Peer comparison

Peers Mkt Cap EV/EBIT (x) EV/EBITDA (x) PE (x)

(AU$m) FY23e FY24e FY23e FY24e FY23e FY24e

Xero (XRO-AU) 15,077 193.3 75.8 54.5 34.6 103.6 65.1

Intuit (INTU-US) 240,015 44.9 26.1 42.0 25.4 34.5 30.3

Dropsuite (DSE-AU) 165 89.1 71.7 102.9 68.4 118.7 59.4

Praemium (PPS-AU) 192 9.9 13.3 7.4 7.8 19.5 14.4

Kinatico (KYP-AU) 41 68.1 24.3 13.1 9.2 39.2 18.5

hipages (HPG-AU) 93 (26.4) 66.5 8.4 6.3 116.9 27.6

Ansarada (AND-AU) 133 (58.8) 141.1 17.6 11.3 135.5 43.8

Peer Average 42,597 45.7 59.8 35.1 23.3 81.1 37.0

Peer Average (ex XRO, INTU) 125 16.4 63.4 29.9 20.6 86.0 32.7

Peer Median (ex XRO, INTU) 133 9.9 66.5 13.1 9.2 116.9 27.6

Reckon (RKN-AU) 62 10.2 8.0 3.2 2.8 11.8 10.8

Average - Premium / (discount) to peers (ex XRO, INTU) (38%) (87%) (89%) (86%) (86%) (67%)

Median - Premium / (discount) to peers (ex XRO, INTU) 3% (88%) (76%) (69%) (90%) (61%)
Source: FactSet, TC analysis

• We have included RKN’s multi-national competitors Xero and Intuit above for reference but have excluded them in
our valuation given the lofty valuations and market size. Instead, we have valued RKN with a skew towards
profitable small caps in the software space.
• Compared to the 21x FY24e EV/EBITDA peer average above, we note the valuation attributed to the APS sale in
2022 was still materially higher at ~8.4x FY21. This implies a ~66% discount to our FY24 RKN estimates.
• RKN trades at an implied 69% discount to peers on a median FY24e EV/EBITDA (TCe) basis respectively. We
temper expectations with the following:
o The growth profile of the peers used is materially more than the Business Group which currently contributes
the majority of RKN’s earnings
o There is execution risk of migrating customers and products to the cloud, away from its higher ARPU
product, Reckon Accounts
o It is a highly competitive landscape when considering QuickBooks, Xero and MYOB’s presence and funding
capabilities in Australia when compared to peers in other software industries above
Discounted Cash Flow (DCF)
Estimates / assumptions
WACC 12.0%
Residual growth rate (after 5 years) 2.0%
DCF per share $0.84

• Assumed 3.5% and 12% growth in the Business and Legal Groups respectively and a 15% discount to allow for
execution and growth risks. Development spend is accounted for in the the free cash flow calculation.

We believe the significant discount to be unwarranted given the stable, profitable nature of the Business group and
the notable potential grown avenues within both Business and Legal.

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Reckon Limited (RKN)
29 November 2023

6. Investment Risks
1. International and domestic competitors
RKN competes against large multi-national well-funded players in the SME accounting and payroll market. There is a material
risk that competitors including Xero, Quickbooks or MYOB take market share from RKN and adversely affects its financial
performance. This risk is also apparent for nQ Zebraworks competing against other ERP and legal software providers, through
aggressive marketing campaigns, product innovations, price discounting or acquisitions. New entrants in the market may also
develop products which compete with RKN’s products.
2. Software
New software products, updates, features and services may not be well received by customers or may fail to meet customer
expectations. RKN may not be as fast to respond to technology changes as its competitors. Nonetheless, RKN has a solid
track record of developing and maintaining crucial software for businesses of all sizes.
3. Exchange rate and currency fluctuation
RKN earns a material amount of revenue from its nQ Zebraworks in USD. There is a risk that fluctuations with the AUD and
USD affect earnings.
4. Data hosting
Any downtime of RKN’s software through its data host AWS (Business Group) or Azure (Legal Group) or otherwise can have
adverse impacts for its customers and affect customer sentiment.
5. Small business
The majority of RKN’s revenue is derived from small business which may have less capacity to deal with any economic
downturn. This may lead to increased churn and impact earnings.
6. Migration away from Intuit codebase
There is a risk that the continued development of the Reckon One codebase is harder and / or lengthier in time than expected,
which may impact earnings or delay unlocking value associated with the new Reckon One codebase.
7. Internet and data security breaches
Despite RKN’s best efforts to combat cyber threats, a cyber-attack or a data breach may occur, or a third party may otherwise
gain access to the confidential information of the Company’s customers or its internal systems. This could result in a breach
of law by RKN, or a breach of client agreements, and may significantly damage RKN’s reputation and brand name.
8. Intellectual property
RKN’s IP rights are valuable and any inability to protect them could reduce the value of its products, services or brands.
9. Small cap liquidity
As a micro-cap, RKN may suffer from low trading volumes and illiquidity issues. Investors should be aware of these risks
when investing in RKN.
10. Aggressive TSR incentive structure
Management may try to grow the business too aggressively to hit the $300m TSR incentive structure or potentially reject any
material offers at a lower band. However we note this risk is lessened given the Founder and Chairman together own more
than 16% of RKN.

TAYLOR COLLISON LTD. www.taylorcollison.com.au

ABN 53008172450 AFSL 247083 11
Reckon Limited (RKN)
29 November 2023

Appendix I - Other Business Group information

Reckon versus competitors – Pricing and Features
The comparison below demonstrates Reckon One’s value offering in comparison to peers without forgoing any necessary
features. We highlight that it is also easier and cheaper for small businesses to scale up given the unlimited payroll.

Source: RKN website, data correct at September 2023 (Red circles added for emphasis)

Appendix II - Legal Group – nQ Zebraworks Overview

Workflow Examples

Source: RKN presentation

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Reckon Limited (RKN)
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Appendix III – Board Members and Senior Management

Board
Clive Rabie- Non-Executive Chairman
Clive Rabie was COO of Reckon from 2001 until 2006 before being appointed Group CEO and subsequently appointed Group
MD in 2018. Clive transitioned to a non-executive directorship role in May 2022. The Rabie family own a substantial 9% of
RKN
Samuel Allert – Group Chief Executive Officer and Managing Director
Sam Allert was one of the first employees in the Australian RKN APS business in 1999 and held numerous positions before
becoming CEO of Reckon APS in 2013. Following this, Sam Allert was appointed to the newly formed position of MD AU/NZ
for the Reckon Group in 2015 which meant more responsibility in the Business division. Sam Allert was promoted to Group
CEO and appointed to the board in 2018 before transitioning to his current position of MD in 2022 where he now sits. He
owns a material 1.5m shares.
Greg Wilkinson - Non-Executive Director
Greg Wilkinson co-founded Reckon in 1987 and has over 30 years’ experience in the computer software industry. Greg
Wilkinson recently stepped down from his role as Chairman into a non-executive role. He owns a material 7.1% of RKN.
Philip Hayman - Non-Executive Director
Philip Hayman co-founded RKN and has varied general entrepreneurial and commercial experience through his investments
in companies in start-up and first round capital raising phases. This experience followed his resignation in 2004 following his
roles as CFO and Head of Logistics. Due to his ongoing shareholding in RKN, Phil maintained his interest in the company
and was appointed to the board in 2018.
Management
Chris Hagglund – Group Chief Financial Officer
Chris Hagglund has been the Group CFO since 2004, being an experienced member of the management team. He also owns
a material ~650k shares in RKN.
Bill Bice – Legal Group (nQueue Zebraworks) CEO
Bill Bice co-founded Zebraworks with four other ProLaw alumni where they leveraged their experience in building SaaS
platforms. A serial entrepreneur, Bill Brice started his first company at age 18, growing ProLaw Software into the largest law
firm automation system for small and mid-size law firms. Joining the acquirer Thomson Reuters, he became a member of the
management team of the $2B West division. In this role, he used the marketing sophistication of an industry leader to take a
brand-new offering to market, West km.
Ken Bassham – Legal Group CRO
Ken Bassham co-founded Zebraworks, utilising his experience helping businesses grow starting with joining ProLaw Software
in 1998 as the National Sales Manager. During his tenure, he rolled out the B2B sales team that accelerated ProLaw’s
expansion, leading to its acquisition by Thomson Reuters. Ken Bassham joined the team at Thomson Reuters as Senior
Director of Sales, overseeing the law firm segment.

Appendix 5 – Share register

Major shareholders % Held

Microequities Asset Management Pty Ltd 12.8%

Rabie Family 9.0%
Spheria Asset Management Pty Ltd 8.5%
Greg Wilkinson 7.1%
1851 Capital Pty Ltd 5.8%
Source: RKN

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ABN 53008172450 AFSL 247083 13
 Reckon Limited (RKN)
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Date Prepared: November 2023

Analyst: Monty Swift
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