Talking Money To Us | Jules Cooper – Senior Analyst at Shaw & Partners

Candice: [00:00:03] Hello and welcome to talk money to me. I'm Candice Bourke 

Felicity: [00:00:06] and I'm Felicity Thomas and this is your need to know wealth podcast where we make the complex simple. We are so excited today as we have some very exciting news to share with you. 

Candice: [00:00:16] That's right, our mates at Equity Mates Media is going to IPO, 

Felicity: [00:00:22] our mates at Equity Mates.

Candice: [00:00:24] I'm not quite literally, but they are hosting their very own initial party offering. Sounds like fun. And yep, you're invited. 

Felicity: [00:00:31] We're really pumped to announce the launch of Fin Fest, so we're calling all of the bulls, bears, party animals to this investment event. The market will be closed on the day because it's Saturday. But the bar will be open. So come and trade ideas at Australia's biggest investing festival Fin Fest. [

Candice: [00:00:48] If you're a regular two hour show, you'll note that we always ask our guest interviews, Take off your tequila. Listen, I might be having a tequila fin fest, so watch out for that. 

Felicity: [00:00:57] We definitely will. With tequila girls as spicy margaritas, 

Candice: [00:01:01] we attend a lot of investment conferences. They never offered tequila, so that's a tweak. And I guess these seminars, what they all have in common is, in our opinion, they lack the young, fresh vibe and that festival feel which fringe fest is going to very much tick all those boxes so you can expect expert speakers and guests, deejays and booze woo. And it's inspiring and empowering event for all investors along their investment journey, you know, from the beginning to the most experienced investor. Save the date in your calendar right now. Pull out your phone 15th of October 2022 and the event will be held in Sydney. Head over to Equity Mates dot com forward slash fiend fest to register your interest today. Equity Mates VinFast Fest. The event is going to be powered by steak. 

Felicity: [00:01:44] I'm so excited. I've already locked it into my calendar, so 221 days and counting. Now, in last week's episode, we gave our listeners the lowdown on the Australian reporting season and went through some of the baits and misses which caught our eye. Today, we're sitting down once again for our interview episode, and this week we have our very own Jules Cooper from Shaw & Partners. Jules is a senior analyst currently responsible for and partners, software and technology coverage. So you've got software and tech businesses such as Whisper, Nitro, Elmo, Jen Track and Technology, one to name a few. Now, before we get into our conversation with Jules, here comes our quick financial disclaimer. Our chat today is not personal advice, and even though we're registered financial advisers at Shaw and Partners, please note that this podcast and the content discussed does not constitute as financial advice, nor is it a financial product. The content on this podcast is general in nature, and you should seek appropriate professional advice before making any financial decisions.

Candice: [00:02:45] That's right, and also the companies that we're going to be chatting about on our show today are offered in good faith based on the facts known at the time and do not contain all the relevant information in respect to their financial products to which they relate. So welcome Jules to the show. 

Jules Cooper: [00:02:59] Thank you, Candace and Felicity for having me. 

Candice: [00:03:01] Thanks again for sitting down with us to chat about the Australian tech sector, Jules. You know, with the recent market volatility, we've seen the tech sector sold off in particular, and now we're in the final days of the Australian reporting season. You are a very busy man at the moment, chatting to all the businesses that you have in your coverage. So we do really appreciate your time. You've been in the industry since 1999. Sounds like a really long time, right? So you would have experienced, you know, quite a few market corrections and pullbacks and, you know, major falls by now, right? 

Jules Cooper: [00:03:30] Correct. So every once in a while, you go through these and it always shakes you. But I suppose what you do in times like this is is to stick to your playbook, which is thinking of about the fundamentals backing good businesses and eventually you come through. The other side has been the experience, definitely. 

Candice: [00:03:47] And it is about staying the course, right? And I guess to give our listeners more context before working at showroom partners, you know, Jules held previous roles at QIC, Citibank, Macquarie Wilsons and Auds previously. His expertise, which we're going to jump into in a moment, you'll understand that he really knows the Australian tech sector really well, and he currently has probably the most broadest software technology coverage in the market, which provides a unique perspective on the business models and the valuations across the sector. We're going to go through Jules dialling in from his home town, the very small and lovely, just joking Melbourne. He loves country music and camping and has three kids aged three, six and eight. So your day job keeps you busy and you're job keeps you busy, so to speak. So jumping right into it, you know, first question I want to I want to ask you, Jules, is let's kick off the conversation by explaining to our listeners exactly what a SAS business is and what the model entails. 

Jules Cooper: [00:04:43] Yeah, sure. That's a it's a good place to start. So I think SAS is a is a term that is probably overused. And if you just boil it down simply, it is how organisations today consume software and it's how they pay for software. Essentially, so if you go back in the early, early days of a bank or an insurance company would have hired a developer that would have written their own proprietary code to to run a software programme. We then move to third party vendors, which wrote software for a broad group of companies and then stored that on the premises of the office of the company. That was was the user. And then now you have that same third party software developers, but producing software that's delivered via the internet and they pay for it. Essentially, they rent it as opposed to owning it. And I think that's the the key change. So what that means is instead of buying a licence for software outright and having it forever, you're paying a monthly bill to access the software. So and then over the longer term, as you're layering in more and more customers, you, you you're creating a very valuable stream of revenues that are both predictable and defensive on the ASX. We've got kind of a mixture of both software as a service software companies, as well as some of the older ones that are in a transition from the on premise models to to success. And really, it's the older ones that tend to be like a two part way through a transition and newer companies, maybe like a whisper. Born and bred in the cloud, so they haven't had to make any transition. But that's really the distinction. 

Felicity: [00:06:23] So are you finding that a lot of companies are actually making that transition from the old model to the new model?

Jules Cooper: [00:06:29] Yes, certainly across the older companies listed on the ASX that have been around for a while. But, you know, because when they started cloud wasn't a concept, you know, software was, but the cloud in the way it was delivered and the way it was sold has has evolved. And I think that's why software stocks have broadly rerated because the business is now more predictable. You know, you don't have those upfront licence fees that created volatility. It's now a recurring revenue stream paid monthly that you know, lies in over time and creates a very high growth and also a defensive business, which is quite appealing yet. 

Felicity: [00:07:08] And now we've been busy digesting the Australian reporting season, so tell us your take on the recent earnings season. How did the SAS tech sector actually hold up? 

Jules Cooper: [00:07:17] It was actually one of the better reporting seasons, from a fundamental perspective. So all our top picks either beat or at least met all beat expectations. I think the only ones that didn't, you probably saw Phineas and Nitro. So they, you know, marginally missed our expectations, which resulted in optically slightly higher cash burn. But it didn't really save any of the stocks, with pretty much much down 10 to 30 per cent, regardless of of that strong reporting season. So they certainly is a what an anomaly in that the companies are actually seeing very good underlying conditions for the for their products. But but the market is discounting them at the current time 

Candice: [00:08:06] and within the ASX, you know, tech software market. Do you know how many companies fall within that coverage? And then of that, you know, we always talk about it with our clients, Jules. There's a huge universe of investments scope, right? And then we need to narrow that down. So of the market that you play in, how much do you cover? Would you say, 

Jules Cooper: [00:08:26] yes, this is, you know, technology on the ASX is a very broad sector, right? It encompasses buy now, pay light up online shopping software and then some other sort of business models as well, all digitally enabled. So I tend to just focus on software. And the reason being is because it has that really nice recurring revenue that we're looking for and provides a very predictable defensive as well as growing company. So look on my watch list, there's 40 companies now. There's some smaller ones that we probably haven't yet sort of turned our attention to. But you know, full force is quite a lot and with them in that 40, we would cover 16 or so. So I think it is one of the broadest coverages you, as you mentioned earlier. 

Candice: [00:09:14] Yeah. So what has to happen for those ones that aren't on your coverage now, but on your watchlist? What has to happen for you to go? Okay, I'm keen to pick up some coverage now. [00:09:22][8.5]

Jules Cooper: [00:09:23] Yes, that's a it's a good it sort of talks to the process. So we're really looking to validate the products, I suppose, of these companies, right? That's what that's what you selling. So we can do that two ways. We're not experts users and remove the software is you couldn't be an expert in every single product because it's all for different uses, different verticals. But what we are looking for is some sort of hint that the market for their products is responding well. So that's either an accelerating growth profile or potentially where you just see some businesses. That is just doing big sales. I always think that's a great litmus test, if there's a if there's a company out there that's willing to pay $600000 for a piece of software, it probably suggests that there is value in solving the problem. And so we just look for those little insights, which is why we tend to steer away then from companies that are just a PowerPoint presentation with an idea. 

Candice: [00:10:23] Yeah, I mean, call me old fashioned. You're looking for recurring revenue and profits as well, right? 

Jules Cooper: [00:10:28] Yeah. Or just someone that is willing to part with hard earned money to to buy their product as opposed to the anticipation of that. We're also really looking for things as we follow the sector. If we see a company that's fallen out of favour, you know, and it's been enough time where it's fallen out of favour, it usually catches our interest because we think the risk reward is kind of then favourable. And then in that situation, then we're kind of thinking about what are the catalysts to return that stock to being interesting for investors. So are the growth accelerating? Maybe there's a sales leadership change or some senior management that's changed, which just from a corporate perspective, if we're seeing corporates actively participating in the space, we might look at a company and go, well, it's fallen out of favour with investors, but it doesn't mean it's fallen out of favour for a broader group of potential investors, I suppose. 

Felicity: [00:11:27] Well, that's quite exciting. So we might have some new ideas potentially in 2022 from you is kind of what we're hinting at. So you did kind of go into this, but let's delve a little bit deeper. So tell us the process and what's involved. When you find a compelling business, how do you actually locate them? Walk us through your day day in evaluating if the business is a buy and one that you actually want to add to your research coverage. 

Jules Cooper: [00:11:53] Yeah. So we sort of touched on it earlier, but that would be the process we we try to stay across the companies and meet with them regularly, even if we don't cover them just so we can get a feel for how the business is tracking. You know what they've got coming in the pipeline. And then we're just really waiting for the opportunity. You know, when you pick up a stock, it's like getting married. So if you can't really drop them that easily. So, you know, we're patient, I suppose. And if we, you know, we patient, we bought our time, we follow the companies and then we're looking for those changes or where the valuation is at a level where we can be willing to accept further bad news and sort of say, Hey, well, you know, we're being paid now that maybe we've got a little bit early in terms of the tone. But at this price, you'd be mad not to be slightly patient and wait six months for the for the thesis to play out if that was the position. 

Felicity: [00:12:55] What do you do to actually find the businesses, though? Do these companies come to you or because you've obviously been in the industry for a really long time? You kind of bring your coverage with you wherever you go. What was, I mean, what was your first stock that actually be very interesting? The first company that you took on to coverage? 

Jules Cooper: [00:13:14] Yeah, yeah. So so there's two questions they say How do we find them? So one which is keeping abreast of the companies that are listed. So we start with that because we've got a cover, a listed company. And like I said, there's probably 40 pure play software companies in our focus list that have a certain sort of liquidity, you know, and a and a business that's proven as opposed to being completely speculative. So we play with 40 and then we choose those ones out of it. When it came to the first software company only shut it down was Heinsohn Technologies. And I suppose you you're conscious that you need to walk before you run. And to us, that's always been one of the most defensive businesses on the ASX. So I thought it was a great place to start. We can learn the industry, the, you know, it's a stop that you can sleep at night. It produces good cash flow. It's not a high growth business, but that, you know, by not being, you know, it has customers that are sticky, that don't leave them, and we can start to learn the industry and the business without taking on too much risk too early. 

Candice: [00:14:20] And would you say, you know, describing kind of the process that you have to to initiate on these companies and then go the journey with them? Do you have more of like a value investment philosophy, therefore, in the sense that you know you do want to see those reoccurring revenues, you want to see those positive trends, they want to see a track record. And if for whatever reason, the market's got it wrong and they've had a few quarters unloved, you have to go in for price. And then I guess the second part of that question is, do you think the value philosophy helps you not as an analyst, fall in love with companies too much?

Jules Cooper: [00:14:51] Yeah, that's a that is a great question. Big question, right? And it really, you know, like, I suppose, I cover growth. It's a growth. Sector software that my disposition is value, and it has been so we try very hard to try to understand how the cash flows are growing and if the business is growing, then we need to understand what that cash burn profile looks like. I think that's one of our big differentiators on the street. We tend to to to model the companies on a on a like for like basis. So you might often see sometimes our numbers look different to the companies, but that's because we've normalised for for everything that company might be doing to present itself in a little bit of a better light. We will be trying to make sure that it's comparable to every other company we look at. And then having that sort of perspective allows us to to sit back and think, you know, for the growth and the margin or the visibility that we've got. Is this the right price today from a fundamental perspective? And then we can we can have conviction in those audits doesn't mean we get it right all the time. But certainly, I think we've got a good track record at picking the inflexions and rewrites in software stocks that have fallen out of favour. Simply just sort of come back into favour. And then there's a lot of upside from that. 

Felicity: [00:16:17] Well, Hanson has actually done very well for our clients, so thank you for that. And just for our listeners, the code is highchair, HSN and it's on the ASX now on the flip side. What has to happen for you to lose conviction on the stock and actually remove it from your research coverage? I know you said that it's very hard. It's a marriage. This would be a significant divorce. Has it happened to you? And you know why? Why did it happen? 

Jules Cooper: [00:16:42] I've only been at shows now for 18 months and that sort of talk more broadly of like previous pluses. So we're very selective on the way in, I think is probably the, you know, the starting base that we're not often dropping companies. If I think about a company that we have dropped coverage of recently, that class, it was because of the takeover. So that that doesn't mean that we wouldn't drop a company. And it really we go back to that thesis if our thesis is that we think the risk reward is attractive. We believe this company is growing and the customers are liking and responding to the product and it's being run well. If that thesis holds would probably willing to be patient and see them deliver that. Similarly, if we sort of get a sense that it's not heading in the right direction or it's played out well with we would drop it in a heartbeat. 

Felicity: [00:17:34] Well, I think we've got a good question actually after this ad break. So in a moment, we're going to be chatting more about the state of play for the Australian technology and software sector, which is really hurting at the moment. And we'll be hearing Jules's top picks and why he likes the businesses. So stick around to hear some interesting stock picks in the SAS sector. But before we do, we're just going to take a quick break and hear from our sponsors. All right, so we actually pitched Nitro on our water pod episode. It has been one of my favourite stocks and obviously it's been hit very hard lately. In your opinion, is Nitro still a buy? And why do you believe it's been sold off so much? 

Jules Cooper: [00:18:15] Yes. Nitro, it's it's been a year. It has been a tricky one, as you've as you've pointed out. So look, I do. It is it is a buy. Absolutely this price. No question. Its products are central to digital transformation and the digitisation of workflows. And you know, essentially what they do is provide, you know, software to be out of manipulate documents, PDFs mostly and also the e-signature software that can enable a document to be signed, you know, in a in a remote sort of setting, which is what we find ourselves more commonly now. So look, I think it's you know, this is these are trends towards digitisation and e-signatures are not changing any time soon, but saying that certainly the last few months have been disappointing. They've lowered their organic growth profile slightly and hinted at a little bit more cost going into the business. So optically, that increases the cash burn when talking a lot. But small amounts, and I think that really know what's been disappointing is that is coming on the heels hot on the heels of a transformational acquisition, they made it with the connected business in Europe and a capital raising. So you sort of put those pieces together, you had a market that was very much in love with this stock. You know, everyone was overweight. It's just, you know, it's it's kind of a fairy tale story and and it's been dealt a very harsh blow by the market. But you know, I would look at this as more of a symptom of, you know, emotion and probably investors being, you know, overly positioned. And then this is also happening in the backdrop. Let's not forget of rising interest rates, you know, risk off around Ukraine and and all those aspects. So it's it's almost like a, you know, the perfect storm. But you know, look, we do believe that that is a company that has a very good growth profile in front of it is growing at 30 per cent per annum and it's trading now on three times revenue with a lot of visibility to reach and break even and beyond. 

Felicity: [00:20:24] Yeah, which is just fantastic, and it is a lot better value than Adobe and DocuSign. And we actually use Nitro Sign in our business. So it's really user friendly as well. I think, like you said, it's just the perfect storm with everything else going on. I believe they probably would be sold off, you know, when they reported and then bounced back up. If we didn't have everything else going on that we do? 

Jules Cooper: [00:20:47] Yeah, I would tend to agree with you. I it's way oversold. And we, you know, recently published a note to that effect. Enough's enough enough, I think. Was the title something to that effect? But yes, certainly here. You know, we see this as great buying for the water, definitely. 

Candice: [00:21:03] And I just want to touch on a point. You've suggested that when you look for businesses that are falling out of love, you go back to how much are they growing, you know, nitrice case 30 per cent. And yet they're trading on three times. So just, I guess, jumping into that. Walk us through. If you're new to investing, how you kind of look at that from a valuation perspective, does that obviously to us, that means it's cheap, but give us the one on one on how you value business on PE multiples, for example, versus their their growing cap rate? Or how are you going to value? 

Jules Cooper: [00:21:38] So I guess with any business that's burning cash today, and if we go back to the way we started the conversation with that subscription model in the old days, yeah, we'd sell a piece of software. You get essentially five or six years of subscription fees in Q1. You pay your sales guy that was driving around in a Ferrari and you'd still make money, but you had to make that sale the next year or the next month. Otherwise you would miss your numbers and you'd still modify that. The sales guy. What is happening now is these software companies are layering in revenue and you're only getting essentially paid for one month upfront, but you're still having to to to incur all the costs upfront. So when we think of a company that is burning cash, we really need it to see it growing to the point where it is no longer burning cash and then going on to produce a decent margin and a cash return for shareholders. At the end of the day, every single company is is a discounted value of future cash flows. And and that is what we, you know, that's that's what drives the value. So with Nitro, when we say it's growing at 30 per cent to us, that is the right that it needs to. And we if we got conviction in that, then we can see that path to break even and then we can see the path beyond breakeven because obviously if the going from. Cash burning to break even the next step is to be profitable. We can then think about what you're paying today versus that opportunity and and that's why we talk about revenue multiples because it's kind of a little bit easy, but we're certainly not losing sight of the potential for that business to generate free cash in the future. And that thing, you just have to keep in the back of your mind. Then if it is burning, cash is do they have the balance sheet that can see them through? And in the case of Nitro, whilst there can be some emotion around the placement and then maybe numbers not kind of fulfilling the fairy tale. One of the great things is they did raise capital at a high price and that's provided, you know, we look at that business and sort of say, you know, even in the worst case scenario, that probably going to have 11 to 15 million dollars of cash in the bank at the time that they reach breakeven. So we see them as fully funded and there's no risk they would have to be forced into an equity raise at a very low price. 

Candice: [00:24:02] Yeah, that's a really good insight. And I guess you've kind of shone a light on the investment case to look at a software business, but talk to us more about, you know, let's say you've got a million dollars you want to put into the stock market in the ASX. Why would an investor think about the tech and software sector? Why do you think it's important we put our money there? 

Jules Cooper: [00:24:23] Yeah. So this goes to the heart of why we decided to specialise in it. So software has been growing as a percentage of GDP since the 1950s, and if you watch the Netflix documentaries on IBM and you know, in the early days, all the software scientists in the Silicon Valley like so it's it is slowly eating the world is a common phrase, and we wholeheartedly believe that because everywhere we see basically software replacing manual processes and people and making it more efficient to do business. So this is something that has been going on for a long time. It's still only a relatively small portion of GDP spent. So, you know, we think it can run for another, you know, 50 to 60 years in terms of eventually we might get to the point where software is controlling everything, but we're certainly not there at this point. And you know, and then when you start to think about, you know, this is a growing sector that has growth ahead of it and then that change in the business model where instead of being upfront licence fees, we're now recurring revenue paid monthly. It is providing a very solid, a beautiful combination of both a growing business, but one that is defensive. And it wasn't really the change on that business model happened, you know, started to happen a few years before Covid. But one of the great things that I think is we went through Covid. We appreciated that was the first test of recurring revenue and the majority of software companies all around the world came through with, you know, being paid because companies have to if they want to use the software. And also they didn't lose a lot of revenue. Now, software used to be very cyclical, went up and down with GDP as as companies had the appetite to spend. But we went through what was a massive draw down on global growth and software companies country that very strong. So it sort of proved its defensive stripes. 

Felicity: [00:26:19] That's really interesting. So we can kind of actually bring it back to our business Candace, rather than being in a brokerage model and having that lumpy sporadic income and face coming in. We've got that annual ongoing advice revenue that comes in, which is less lumpy and not really affected during Covid 

Jules Cooper: [00:26:37] software as software is not. The recurring revenue is not the it's not just in software, it's just that that is, you know, utilities and telcos have been doing it for years until how you pay your bills. You know, you don't build the power plant, you just pay you to get your electricity, you know? So it's it's a beautiful business model. 

Felicity: [00:26:54] I wish that was lumper and more once off, but it doesn't seem to be. 

Candice: [00:26:59] You've touched on a good point. I think everyone is somehow involved with software, whether they know it or not, whether they're consumer or business, you know, through COVAX. A good example. That's how businesses use technology and software to communicate to the wider community. Consumers and the audience, for example, are going to Texas morning. My Australia Post is on the way today so that that is crucial to what Jules is saying. And I guess 

Felicity: [00:27:24] we're using it right now, right? Like we're using it right now.

Candice: [00:27:26] Yeah, correct. Whisper is this is an example of that tech behind. They're looking at your comments, just thinking on your comment there that it's a big part of the Australian GDP. What about overseas looking to other markets when you cover the Australian SAS sector? You know, where are you looking in particular overseas? And has the recent European war heavily impacted the sector, in your opinion?

Jules Cooper: [00:27:49] We cover what we have in Australia, but there are some fabulous businesses listed, particularly in North America. And you would. Microsoft, Salesforce, Workday, ServiceNow, Atlassian. I mean, these companies are the future of how enterprises will run. And essentially, they're going to be a tax on on big business. They are probably off in some cases, 10 to 40 per cent of their highs. And I think they just look incredible. There's no business on the planet that can do without Salesforce today. So, you know, and it's not that expensive anymore, maybe trading at about 30 times cash, but the growing 20 per cent and. Likely to continue growing for at least the next decade. So there's some incredible buying opportunities, not just on the ASX, but offshore as well. So do 

Candice: [00:28:46] you think the US is leading the way and says 

Jules Cooper: [00:28:49] by far, by far. I mean, some of the best companies in the world, are they now? They tend to target those companies. I just listed a targeting very big like CRM, you know, like operational management and let's say cetera. But you know, so so when we're looking at the ASX, we tend to have a lot of vertical software that maybe has a small, small aneesh. But certainly, you know, is either integrating with some of those big platforms like Nitro, for example, that you mentioned has just announced its integration with them with Salesforce. I mean, you want to align yourself with the big platforms that have behind most enterprises. And then just try and find the, you know, the nice little businesses on the ASX that that have a global opportunity in front of them. But just on the Ukraine piece, I don't think that, you know, I don't really see it as having a major impact. I mean, most customers for software based in the US or Europe. Yeah. You know, I think on the development side, there are some companies that access software developers in the Ukraine, and there are a lot of talented people there. They have been providing, you know, that sort of outsource software development. But for the most part, across our coverage, we don't have too much exposure to it. 

Felicity: [00:30:04] Yeah, I guess this kind of leads into the next question. I mean, a lot of people do say you want to get out of tech when we're moving into an inflationary environment, but it'd be really interesting to hear your opinion. You know, how does that impact the sector in your opinion? 

Jules Cooper: [00:30:20] Yeah. So I'll just caveat this by the fact that on a fundamental stock analyst and it does bewilder me a little bit why people say different things. But in my simplistic view, you know, inflation puts pressure on costs now and and a secondary thing to that is once you've got inflation, central banks have to raise interest rates to tame that inflation, which impacts the discounting of future cash flows. So I made the point that inflation for software companies has is not, nothing new. But they've been dealing with the war for talent and trying to get good software developers in their business for a long time. They've got lots of different ways to manage that. That's why they have foosball tables, you know, double the fun places that they're trying to create an environment that can limit some of that, that cost inflation, that they're seeing. So look, they're well, adept at doing this. Certainly, the closed borders have had an impact on ASX companies, particularly the ones with bases here, because it is is forcing the pressure up. But hopefully, as the board is open and we can have, you know, software developers come and take out life in Australia, that should be, you know, beneficial. And then I guess the the last thing is on the inflation side, one thing that I think about is these are core systems that are running businesses. It's very difficult to get it out of your business once they're in. So if you're an inflationary environment, I think you want companies that have pricing power. And you know, one of the things that you can say across, you know, for example, Xero, it is put up its price several times in the time that I've been looking at it, as did Mile was has pricing power. LTM has pricing power technology. One puts its price up five per cent a year. You know, it's yeah, I think because the systems are so core and essential to that, to a business in an inflationary environment, you want a company that can actually put up its price. So I actually think software is where you want to be, to be honest. But no, 

Felicity: [00:32:22] that definitely makes sense. So market leading and pricing power, as well as that strong revenue growth, you know, and you've been saying a lot of these tech businesses or double digit, which is just huge when you actually think about it, you know, 20, 30, 40 percent, that's absolutely massive 

Candice: [00:32:39] and a sticky business model, right? Once a customer decides to use the software in tech, they're in there for a very long time, right? And Jules does cover businesses that generally have, you know, long tender contracts like maybe five, seven years, right? Particularly if you're working with governments. So could that kind of leads us to we hear it took money to me are all about giving investable ideas. We know you cover about 15 16 stocks of your 40 universe, but right now, markets come off. Good time to buy. We agree with that statement or top 

Felicity: [00:33:12] up because we already hold them

Candice: [00:33:13] on top up. Yeah, correct. So what would be your number one stock pick right now and why? And talk us through the business, what they do, how they make money and why you think it's a go? Yeah. 

Jules Cooper: [00:33:22] So I'm going to have to, if I could, the more the better. Yeah, know the flavour, a flavour there for both. So the first one I'm want to talk about is whisper. So we've got that on a bi. We've got a $4. Eighty five price target. You mentioned it before, floods, bushfires. This is where we spoke comes into its own, it is a messaging platform, SMS messaging platform that is sold to enterprise customers, largely via its channel partner relationships with the likes of Telstra. It's had a relationship with Telstra for well over a decade, so that business grew 70 percent year on year in the first half. 

Candice: [00:34:00] 70 per. 

Jules Cooper: [00:34:01] This is last year. Now they had a key role in the government's vaccine rollout, so we have to take that. That's not a normal half, but it certainly shows you the power and the capability of what that product is capable of doing. It basically executed the biggest messaging task that's ever been undertaken in Australia. If you were to exclude that little bump, it's probably growing more like 25, which is not shabby. But and we think there's a long way to go in terms of penetrating their existing customers. If you just think of how many emails you get, you know your phone is paying a lot these days more than it used to, but you still get way more emails than SMS. And businesses realise that if you want to actually get someone's attention, whether it be a customer and employee, you send them a text message. And I think Covid is really sort of flipped the switch on it. Maybe it was before a little bit kind of like, can I take someone unless I know them? Whereas now it's like free for all. So they provide a platform to to distribute those messages that, you know, strong partnership with Telstra that I mentioned, you know, Whisper was recently sold alongside Telstra in the largest enterprise deal ever done with the Department of Defence, and it shows you, I think, the benefit of having executed for the Victorian Health New South Wales Health through Covid. They're now front of mind for other government departments looking to solve communications problems. SingTel recently partnered with Respect, and I would like Whisper to be its messaging platform for all its enterprise customers in Singapore. So we're at the early stages of of that channel partner relationship really coming and bearing fruit. And they've recently over the last sort of nine months or so started to invest into the US, building a sales team, generating some some content and getting customers. And in the last half, we saw the arrival of the recurring revenue in the North American business double. So it feels like we're we're starting to see some, some inflexion. So you sort of put those three things together. You've got a very strong Australian business growing at least 25 per cent North American business, with lots of opportunity now starting to find its feet and SingTel up in Asia, potentially being as large as what Telstra is today down here in Australia, we think that is incredibly compelling and provides that visibility to break even beyond. And you're buying it for two times its revenue today that it's generating from its from its customers. And it's supercharged, I think, in terms of a recovery, but does come with some, you know, it's got a high risk profile because of that cash burning position that it's in. 

Felicity: [00:36:56] And that sounds great. And just for our listeners, the code is WSP and that is on the ASX as well. 

Jules Cooper: [00:37:03] And the other one, if you wanted to take a more pedestrian approach, which you know it's entirely sensible, is technology one. So that ticker is today we've got a buy and an $11 19 price target. So Technology one provides cool systems to councils and universities in the form of student management, and it does that in Australia and in the UK, increasingly so. It is one of those older ASX software companies been around for a long time, so it's partway through a transition of migrating its customers from an on premise delivery model and payment model to subscription that they have invested in the product. So. So we sort of feel that we're through the cost side now. It's just about layering in that revenue. And we're at the point now where the cash flow can can really start to come into the business. And we think they've got a lot of line of sight to the target of 500 million IRR by, if what, 26 or recurring revenue. So that should drive 20 per cent compound growth in cash earnings for the business. And today you can buy that at thirty two times next year's cash earnings. So you roll forward another 20 per cent, another 20 per cent, another 20 percent, another 20 per cent. You're going to be left with a stock that is actually quite inexpensive and still growing at 20 per cent, which we think. Very attractive, protecting the downside, if this is a business is making money, know they make a lot of money. They've got $100 million cash on the balance sheet. It's rock solid and it's sold off a lot in this recent sell down. You know, the market sort of sell off, and it's now trading at around 30 times. As I mentioned, cash in the dot, which when you go back and look at this company over six or seven years has proven to be a low point in its valuation range. So great business trading at the low end of its historical range, maybe a little out of favour, but certainly 20 per cent compound growth. I don't think if it goes into five. 

Candice: [00:39:14] Definitely not so. Jules's two buys just to reiterate is whisper WSP and TechnologyOne team-mate on the ASX. So as I was listening to those buyer convictions, what really stood out to me is if I think back to Microsoft and Salesforce. Like Jules mentioned, it took what Jaws probably like over a decade for these companies to, you know, I guess, show the value proposition and actually start to reward shareholders in the form of dividends. So I know Tina pays a really small one hands and does. You said at the start of this conversation, we're going to put more and more money into the software tech space because we have to we got to live with it. So you do see, I guess, the whole sector eventually following the footsteps of Microsoft and, you know, paying as more value investment preferences, a.k.a. a pretty attractive dividend. 

Jules Cooper: [00:40:00] Absolutely. The software is it's capital light. You know, you, you build the software, you got to maintain it. But there are very good margins to be made, particularly when you are the dominant platform or have a large market share with your customers. So the cloud internet will its software eventually is just going to be like a utility. You have to pay Microsoft if you're a large company operating with people, which everyone does and customers. I think all of them have it. You have to pay Microsoft. You know, they're essential to your business that now never all your data, that they run all your operating systems, you know it is. It becomes very infrastructure like at the end of this growth phase. And I think that's going to produce very good dividends for the shareholders. 

Candice: [00:40:50] So you heard it here first, guys, go the journey. Now, stick with these growth businesses. Stay the course because very soon, probably in the next five 10 years, they will become like jaws saying infrastructure very much every day, bread and butter companies. We attracted as investors to the infrastructure and and rates and utilities because they are slow and steady. Blue chip companies that pay pretty nice dividends are, like you on average, three to five percent cent. So that's great insight. 

Felicity: [00:41:19] Now we have a very, very important question that we like to ask all of our guests coffee, tea or tequila kilojoules 

Jules Cooper: [00:41:28] all depends what time of the day 

Candice: [00:41:32] they're coming into lunch. So what would be your drink preference at lunch? 

Jules Cooper: [00:41:36] Look, I'll probably have a cup of tea, to be honest. And then at five o'clock, certainly have a tequila 

Felicity: [00:41:43] lover, especially at the moment, right? 

Candice: [00:41:45] Thanks so much for joining us. Now, before we sign off, please remember, although Felicity and I are financial advisors at Sharing Partners and Jules is a senior analyst in our research department. Please note, the discussion today does not constitute as personal financial advice. As always, you should seek professional financial advice before you make any of your investment decisions. 

Felicity: [00:42:04] And as we wrap up for today, just a reminder about the Equity Mates event. Finn Fest is to be held on Saturday, the 15th of October. The event is powered by stake and we encourage you to head over to Equity Mates dot com slash Finn fest to register your interest today. 

Candice: [00:42:19] Don't miss out. Thanks so much again, Jules. Thank you for having us!