Post New

Hello, I recently read the Daily Journal 2024 and 2023 annual reports and was wondering if any of you Berkshire shareholders here own and follow it?

My questions are:

Have you seen the software and how does it compare to their bigger competitor?

Have you heard anything from customers, or employees about the software?

Can a small software company compete long term against bigger rivals. who can recruit better engineers and enjoy the scale benefits from having more customers?

It seems really challenging for Journal Technology, however they seems to be moving forward as outlined below. Charlie has previously said the complex nature of these projects dealing with big bureaucracies with sometimes bespoke requirements makes this a bit like a consulting business like PWC and Journal Technologies is winning customers and bigger players may not be as flexible at making it work for clients.

Well known to anyone who follows the Daily Journal these are comments on the investment opportunity and current trading.

You have a market cap made up of a concentrated equity portfolio selected by the late Charlie Munger. It’s a handful of US banks, Alibaba, BYD (if not fully sold). The equity portfolio makes up call it 70 or 80% of the market capitalisation. That provides an interesting down side protection not available in many companies. (The equity portfolio was trimmed in 2024 and Charlie’s margin loan was reduced. Alibaba is doing well of late with its AI tie up with Apple and BYD is making progress with autonomous driving. But I’m not sure how much BYD DJCO still holds. It does still hold BABA.)

The remaining value is in the famous venture capital type software business Journal Technology. There is a very large total addressable market and a long growth runway. It’s high return on capital.

Working from memory and imprecise numbers, Journal Technology has recurring licensing type revenue of around $40m and you are currently paying around 4X that revenue. That recurring revenue is growing rapidly at around 20%. This is probably the only indicator I personally have, that this is a potentially good business. I’d like to know more about the software and how it’s viewed and developing. This might well destroy the investment thesis as more is learned.

Journal Technology famously does not charge customers an implementation fee until project go live. Implementation costs are expensed as incurred. Projects probably take 2 to 4 years to complete, or longer so there is an amount of potential implementation revenue and cashflow waiting for go live and billing. We don’t know the size of this well of unbilled income and it’s maybe not that important in itself, compared to the recurring licensing income and scale benefits that it may lead to.

Interestingly this implementation income is volatile over arbitrary 12 month periods. In 2023 there was a big increase and in 2024 there was a big decline. We hope it’s lumpy and not just declining. The company also told its customers around covid time that it was discontinuing support of an older software platform and moving everyone to their more modern offerings. That is bound to have pushed some customers into the arms of their competitors and been a negative force on revenue.

It looks to me that the stock market got excited about the 2023 revenue growth, due largely to this lumpy go live revenue and then got more pessimistic when the same lumpy revenue declined in 2024. There is a potential insight here. The recurring license fee income is growing rapidly as noted above and is hidden within total revenues which are flat. And the growth has been depressed from the migration to the new platforms.

There is another major dynamic happening at Journal Technology. The new CEO is making changes. He is addressing previous concerns around not paying engineers enough and he is pushing hard and faster at improving the product experience for customers and future proofing it. Prior to the new CEO there may have been too much emphasis on keeping costs down. In my opinion the new CEO is doing the right thing. Build it, delight customers and spend the money to get it done fast while the opportunity to digitise and modernise these difficult bureaucracies is still open. But that comes at a cost and that can be seen in the 2014 operating cashflows which are essentially zero. But remember, they are expensing all implementation costs as incurred, during this roll out phase, so the underlying free cashflow is not zero and will not be zero in the future when the market is fully saturated.

Mathew Peterson who follows the company closely, thinks the recurring license fee revenues can get to $100m by 2030 (currently $40m). That is another question I have for you. What operating profit margin would a business like this make long term? I’m thinking 30%, or something given the stickiness of the customer base, previously referred to by Charlie.

The new CEO had made noises about how he might use the capital created by Charlie Munger and cautiously mentioned acquisitions. Personally that would be a turn off for me but it would of course depend on what the bought and what they paid. I’m hoping they don’t do a large acquisition.

Anyway, my questions above are around any information you might have seen that from customers, employees etc about the quality of the software. Or if you can suggest any places to look. I will reach out to Matthew Peterson and see if he would comment further. I know from experience with these types of configurable software platforms that there is a very mixed bag of offerings and clearly it is fundamental to an investment in DJCO that they are on a path to delighting customers…

Any assistance would be much appreciated.

Best wishes
EVBIGMACMEAL, (DJCO shareholder for about 4 years and considering buying more. Aware of my Munger liking and authority bias and the dangers in that in this situation and therefore correctly looking to scuttlebutt and destroy the investment thesis!)

*But that comes at a cost and that can be seen in the 2024 operating cashflows which are essentially zero.

Apologies as this is not Berkshire related.

Found a transcript of last years Daily Journal meeting posted by Rational Walk. A lot more detail on how the new CEO is running and changing the software business.

https://rationalwalk.com/daily-journal-annual-meet...

I bought more DJCO today. I am loving what the new CEO is doing. Making the software more scalable and configurable and using implementation partners for example, is an great move to increase margins and grow the business. Lots of very positive new business being discussed last year. As noted previously, the recurring revenues are growing at over 20% and that is a very healthy sign.

There will hopefully be a 2025 AGM transcript online at some point but no sign of it yet. Meeting was last week I think.

Valuation:
Today you are paying $538m for the firm.
You get about $400m in equities, cash, RE less margin debt (Bank of America, Wells Fargo, Alibaba, US Bank Corp, Posco and probably BYD and Tencent, some real estate).
You get Journal Technologies for about $140m.
These numbers are back of an envelop really and others might have better information. Do your own research.

What are Journal Technologies numbers like?
In 2024 the recurring revenues (excluding implementation fees) were $38m. FCF was nil but that's because they are expensing all the development work. If you put a EBIT margin of 30% on the 2024 recurring revenues and pay tax, you are paying about 16 times 2024 pro forma FCF for JT. In this hypothetical scenario, you are assuming all development work stops and they just cash cow the existing customers. That's not the plan and this is just for illustration purposes.

By 2030, if they keep growing like they are at 20%, they get to over $100m in recurring revenues. Again applying a 30% EBIT margin and tax. That gets you to a 5 PE multiple on 2030. It does look like they are on track to get to this and then you are in a situation where you own a very profitable software business with customers that don't want to move. And reading the linked transcript from the 2024 AGM, you hear them talk about the international market opportunity that they are working on. It looks to me they are on track and are speeding up.

I learned yesterday that Warren Buffett owns 20 shares. All that Charlie would allow him to own. Not significant but he obviously reads the reports and keeps an eye on it.

What I like about Daily Journal, despite it being a venture capital type investment. You have the downside protection from the equity portfolio. You have this organisation that has lots of little Charlie Munger finger prints all over it, that suggest to me that you can buy it and sit back for 10 or 20 years and enjoy watching all these qualities eventually produce shareholder returns. And now you have this new CEO, that has done exactly this kind of thing before and has been selected by Charlie Munger. He is already moving the business forward.

I am wondering if there are any Daily Journal interested parties out there willing to share their thoughts on the recent Q2 2025 numbers?

Daily Journal's market cap is $574.8m. Two parts to the value of the company: About 30% Journal Technologies ($167m implied market value) and 70% the concentrated investment portfolio $407m($432m at 31 Mar 2025 less $25m margin loan and ignoring deferred taxes).

Summary of Journal Technology recently published numbers:

Licensing and Maintenance Fees (54% of revenue) up 6% on an annualised basis versus 2024. 20% growth in 2024. 22% in 2023. A little slower, or may be related to customer annual renewal dates.

Other Public Service Fees (26% of revenue) up 49% on an annualised basis versus 2024. 19% growth in 2024. 16% in 2023. A healthy sign.

Combined recurring revenue growth of 17%, a little shy of my 20% hope until 2030.

Consulting Fees (Go live implementation fees) 6 months to 31 Mar 2025 annualised $10.6m (2024: $15.1m, 2023 $19.8m, $11.9m). They might be focused on making things better for existing customers and have a number of legacy technical debt challenges they are working on. Or could just be lumpy and of no significance. Or could be the timing of one large contract.

Investment Portfolio:
Market value at 31 March 2025 $431.5m (30 Sep 2024 $358.7m). Quite an increase. The 13F discloses WFC $101m; BAC $83.4m; BABA $25.8m (could be further HK shares); USB $5m.
Certainly Wells Fargo up 27% and a large part of the portfolio will be part of the reason for the increase.
BABA is up about 14% during that period.
Not disclosed foreign holding: BYD, is up about 43% during that period. I recall someone saying DJCO had sold a lot of BYD (as Berkshire did) but maybe they are still holding it. I don't know.
I also saw someone say they might own Tencent.
Wabuffo tracks that kind of thing but I don't use X these days so don't know if he has commented recently.
In terms of valuation of the DJCO equity portfolio, it is probably below well below the S&P500 PE. US banks low mid teens. BYD mid 20 PE. BABA low mid teens PE. Charlie Munger selected but as the years pass that becomes less relevant maybe.

Questions:

Has the large Australian contract gone live yet? If not, when might that happen? Any issues, as it seems to be going on a long time. There were previous reports in 2019 that it was an $89m project and that go live would be 2021. Either, I am missing some big news story, or the project has been delayed but is about to go live soon, or some other negative.

I would like to know who is managing the equity portfolio and are there any plans to appoint someone? Personally, I would sell half of it now that Munger is gone and the market seems high. Charlie’s idea was that it was better than cash in an inflationary world and China was better than US. He has been wrong about China, so far. He famously used margin debt to compound his mistake. That’s hard to justify, when the company doesn’t need the cash and is not a hedge fund. Equally, Charlie created the money out of thin air, during the great financial crisis, so it's hard to criticise him. Further the current market set up in the US and evolving geopolitical and inflationary risks are not over yet and no one knows the future. In fairness to the new CEO he sold around 10% in 2024 and paid down the margin loan. I don't see how the company would need so much capital to develop Journal Technologies. The business is self funding currently.

If they did sell more of the equities, what would they do with the money becomes the next question, with no easy answers.

Journal Technologies Valuation update:
Total DJCO market cap less 31 Mar 25 portfolio value = $167m.
Recurring revenues 6 months to 31 Mar 25 annualised $44.5m
30% operating margin = $13.4m
Less 21% tax = $10.5m
PE 15.8
(This is valuing the business on a future pro forma basis of expected margins. It takes no account of implementation fee income, which eventually fades away. It takes no account of expected revenue growth, which is expected to get from the current $45m recurring revenue run rate, up to over $114m by 2030, at a 20% growth rate - which would take the JT PE down to 7.5x. But that is only for that element of the DJCO valuation - the 30% noted above.)

Can any of you fill in any of the blanks for me?

Digging around the internet it seems the following may be the case.

The Australia market is progressing well. The software is already live is various locations, with further implementations likely this year. Business as usual for Journal Technologies. Continued incremental growth. There are company promotional website postings supporting this dynamic.

The investment portfolio is likely:
WFC $100m
BOA $82m
USB $5m
Tencent $117m
BYD $102m
BABA $28m

My understanding is that the Chinese holdings are established from tracking the share prices and it fits with the reported total market value. We know they owned BYD and a swap out of BABA into Tencent is consistent with public comments from other investors close to Charlie Munger.

The interesting thing about the DJCO investment portfolio, which is 57% Chinese and 43% USA, is more relevant today with the growing US government debt concerns and general small change in sentiment to diversify out of US equities and the dollar. Many people do not hold Munger’s view on China but it is an interesting diversification I thought opportunity for consideration.

The financial statements refer to the board taking advice from outsiders on the investment portfolio, which led to the 10% liquidation in 2024. Given the Chinese investments and history of Charlie Munger’s close ties with Li Lu, I would say there is a reasonable probability he is the informal advisor.

BYD and Tencent have been performing very strongly. BABA has improved its outlook with AI and cloud but it’s not doing as well as Charlie and Li Lu would have originally anticipated and it is now less significant to DJCO.

The new CEO is moving the software business forward on the right path and the future looks promising.

All in all, I see DJCO as reasonable value and should do fine over the next 5 and 10 years. It does provide exposure to a small group of 6 public companies and a growing software business. It provides some diversification from the US and exposure to a few of China’s strongest companies. Not something that everyone wants. But Charlie Munger considered it a reasonably good idea for the long term.

Over at Berkshire, Buffett is taking a different path, with cash and some Japanese equities but essentially heavily invested in the USA, which looks pretty smart all things considered. Despite the problems the US has, it’s not until you look closely at other countries and public companies in Europe and China that you realise that the lower prices are often deserved.

Berkshire is a great investment, particularly for US citizens. Less so, if you are outside the US with the combination of modest return expectations, due to a full valuation and currency risk. Still my largest holding though.

Interesting times as always…

Post New

Berkshire Hathaway FAQ

---

Contact Shrewd'm
Contact the developer of these message boards.