Objective Corp reported last week. From their presentation:

Remember that OCL changed accounting policies in terms of expensing R&D. Changing from expensing 100% to 50%.

In 1H FY24, total R&D spend for $13.557m with $7.2m being expensed through the P&L. On a comparative basis, NPBT would have been around $13.3m compared to $10.7m in 1H FY23 had the R&D expense been expensed in the period. NPAT would be around flat only due to an increased tax expense in the current period.

Personally I thought this result was pretty good although I think it will be better to wait until the full year results for a better comparison given the seasonality of OCL's customers (public sector customers usually pay during the 2H).

In the shareholder letter from CEO Tony Walls, the outlook provided was strong with management targeting ARR growth of 15%. They also provided an update in regards to potential acquisitions with them having done some due diligence on a few potential candidates but ultimately deciding to focus on building the business organically.

Disc: Held IRL and on Strawman.

Buffet stated on buybacks "Blindly buying an overpriced stock is value-destructive, a fact lost on many promotional or ever-optimistic CEOs"

Objectives last years earnings were flat and they are only forecasting 15% growth. Currently on a PE of 48, would this statement apply to Objective I wonder. I wouldn't call them promotional, but can't help thinking that there is a good chance they are trying to support their share price, especially when taking into account Gary Fisher has sold over $40m worth of shares over the last two years.

They may be hoping that the market will re-rate them now that they have decided to capitalise 45-55% of R&D, but even using this model, they are still trading on a PE of 32. R&D is an ongoing expense to their business and I personally have a problem with the way software companies capitalise R&D. Charlie Munger once said EBITDA earnings are bullshit earnings.

I would have thought their money could be better used for M&A, since they have detailed that this is part of their ongoing strategy.

Objective/Altium comparison

I have been doing a comparison of Objective (OCL) to Altium (ALU) as they are both high quality software companies that have shown good growth over the last 10 years. Both business I have been following for some time. Whilst in very different industries they both have excellent recurring revenues and stable management.

Differences/Quality

• OCL is a software provider to government mainly, whilst ALU provides software to design circuit boards to industry.
• ALU has many more clients and is a lot more diversified in my opinion than OCL, who concentrates on govt, which is sticky but the loss of a large customer could be a huge headwind.
• Both have great management but OCL seems to be run by a CEO who has a lot of control, whereas ALU has an experienced diversified board. OCL almost runs as a private company, where ALU is engaged with the market and transparent.
• ALU has had a great year in FY23 growing at almost 20% where OCL's revenue has been pretty flat.
• OCL is forecasting 15% growth over the next few years and ALU's USD500m target indicates growth of around 25% out to 2026

Valuation

Assuming management of both companies can achieve their target growth, then by 2026 ALU will be on a PE of 24 assuming a NPAT margin of 29% and OCL will be on a PE of 22 assuming the same margin. I have used OCL's updated financial model to capitalise R&D and am assuming they are similar in this way. Share price of OCL is $11 and ALU $42 at this time.

Conclusion

Whilst both are very high quality businesses and should provide good returns if they can meet their targets, ALU to me is more attractive and better value at these levels. ALU is likely to grow more than 50% faster than OCL and is on a similar multiple three years out to OCL. ALU is a more diversified business with a more mature board and is more transparent with the market.

Objective release its FY23 result this morning. As guided to market the result will be muted compare to other years.

Revenue:

Customer Receipts

Operating Cash

No. Of Shares on issues

Objective corp is no doubt a very high-quality company with a very aligned CEO who owns a significant portion of the business. Historically, Objective corp has bought back its Shares on market at a very opportune time and they are currently going through a buyback program that intends to buy 10% of outstanding shares on market. Does that mean management thinks business isn't valued appropriately by the market?

So I have analyzed OCL's FY2013 to FY2022 results and put some of my FY2023 and FY2024expected figures to see

Objective Revenue and Free CF graph tells how the company has performed and what my expectation for the next 2 years.

Let's see how market sentiment has shifted for this company.

Now, Even for my projection revenue and Net profit for FY23 and FY24, I give Price/Sales = 8 and PE = 40 valuation comes in between $9.13 and $11.32 ( Not sure if the market will give this valuation in the future - but OCL is a very high-quality company run by high-quality management with recurring revenue serviced to very defensive customers and expensing 100% of R&D (~20% of Revenue) deserve premium )

So I am a bit baffled that Objective is buying back its share in the range of ~$12.00 - $12.80. It will be interesting to see how the next couple of years unfold and will give us insight as to how to value such a company.

PS: I has similar thought when $PME were buying back their shares at ~$25 in 2019. look at it today - even in a bear market, it returned 100%.

Objective CEO's recent letter has an interesting comment about the market.

Objective Corp provided a trading update a few days ago. Key highlights were that ARR revenue increased by 15% to 85.5 million. Growth continued across all product lines ECMaaS (61% growth over FY2021); RegWorks (45% growth over FY2021); Connect (20% growth over FY2021); Trapeze (25% growth over FY2021); and Keystone (7% growth over FY2021).

All in all a pretty positive trading update.

OCL a quality company with good outlook and plenty of cash to help last through troubled times.

• over $30M in cash
• mostly governement clients so low risk or clients going bankrupt
• Annual recurring contracts approx 75% of revenue.
• OCL has bought back some shares in last week showing that they have confidence in their financial position.

I would expect revenues for OCL to hold up reasonably well given that they are mostly Governement clients and recurring payments.

The recent decline in share price is a rare chance to buy.

Revenue growth may be reduced for a while but once the impact of Coronavirus are behind should continue.

Adding it to my scorecard today.  It could still go lower but I am confident that the company willl survive and do well in the long term

Objective Corp has issued an encouraging trading update for the half ending December 31, 2019.

Revenue is expected to grow by 14% to $33.2m, while operating profit should rise 24% to $5.8m.

The cash balance remains very healthy at $34.1m, a 16% improvement from the previous first half.

A wonderful company that continues to deliver. At the time of writing (share price $6.10), though, shares are on a P/S of 8.6 and an EV/EBITDA of ~35.

Reasonably high multiples, despite the strong and consistent growth -- although, as pointed out by others, partly explained by the fact they expense ALL of their R&D (many other tech companies capitalise this on their balance sheets and is therefore it is not included on the profit&loss statement).

For reference, they spent around $13m on R&D last year. If half of this were capitalised, the EV/EBITDA ratio would drop to roughly 24x.

ASX announcement here

An interesting business model targeting governments and which is launching a new subscription model with several aspects to the business.

ARR - Up 17%

Annual Report: http://www.objective.com/assets/annual-reports/objective-corporation-ocl-annual-report-2018.pdf

Further reading:

Research done by Sam from Totus Capital found on LiveWire: https://www.livewiremarkets.com/wires/buy-hold-sell-5-high-quality-mid-caps

Sam Granger: Yeah, we think Objective Corp in the small-cap of software spaces is buy. It's a very high-quality business for two reasons. Number one, their transitioning from a perpetual licence fee model to a subscription model. And what that does is it means cash runs ahead of profits through that transition. And second, it's got a very defensive and customer base. So they sell to governments, local, state, federal. 98% customer retention, and a very defensive high-quality business.