DJCO - Daily Journal Corporation

[Spekulatius]

What’s the success rate of 90 year olds running SAAS business? Asking for a friend.

 

I heard Munger talk during one of these meetings and he was saying how they are investing for the long run.  If I had to pick a 90 year to lead a SaaS business, it would be those clowns.

 

I am sure hotshot 25 year old software engineers line up to start working for the Daily Journal in  of going to work for the likes of Google, Snowflake etc. What’s the point of getting rich quickly with stock options anyways?

[Orchard]

Who says you need top software engineers to run a tech company? Look at Twitter. Yeah they are super hip and bla bla bla, but what have they done other done building a website that hasn't changed in 10 years?

[fareastwarriors]

The price action of DJCO is quite impressive over past 2 weeks or so. Wow

 

[ValueMaven]

I think a lot of it is due to BYD position...people are looking for indirect EV plays

[wescobrk]

Does anyone know of any write-ups regarding the numbers aspect of BYD when Berkshire made their investment?

 

I'm curious how they compare to some EV metrics today. Of course, interest rates were a lot higher back then. I remember Munger commenting how amazing the founder of BYD is but I don't recall the market cap of BYD, the sales and number of vehicles produced over the previous 12 months, the debt on the balance sheet, number of employees, etc.

 

Thanks if anyone has this info.

 

It is interesting Munger never invested in Tesla. He was wrong on the outcome but you can argue his process was correct since Musk said Tesla was 30 days away from bankruptcy in 2018. Tesla was an asymmetric bet, in hindsight of course, it can be argued an investment should have been made of 1% or so back in 2013 after we could see how amazing the Model 3 was. You have to give credit to Musk. I don't know of anyone that has the metal strength of Musk that combined with his technical proficiency is nothing short of amazing.

 

Does anyone know if BYD ever got close to bankruptcy?

[gfp]

As far as Berkshire's investment in BYD through MidAmerican (sorry to clutter up the Daily Journal thread) - Sokol made the investment before BYD had sold any electric cars.  They were to start selling hybrid gas-electric cars a few months later in 2008.  Berkshire paid $230 million for 10% of BYD on 9/29/2008, putting the market cap at that time at approximately $2.3 Billion USD.  Batteries, R&D and management were the attraction.  Li Liu -> Charlie -> Warren -> Dave Sokol ultimately was told to go check it out to appease Charlie.

 

an article from that time:

https://www.ft.com/content/235c9890-8de5-11dd-8089-0000779fd18c

[wescobrk]

Thanks!

Munger invested prerevenue at a $2 billion market cap.

35 bagger

[gfp]

Not pre-revenue.  BYD had several businesses before pure EVs

 

https://www.byd.com/sitesresources/common/tools/generic/web/viewer.html?file=%2Fsites%2FSatellite%2FBYD%20PDF%20Viewer%3Fblobcol%3Durldata%26blobheader%3Dapplication%252Fpdf%26blobkey%3Did%26blobtable%3DMungoBlobs%26blobwhere%3D1600575149851%26ssbinary%3Dtrue

 

https://www.byd.com/en/InvestorAnnals.html

[ValueMaven]

Just watch this - Munger on BYD:

 

With that said - BHE is now sitting on a paper profit of about 1Yr's operating income in BYD - after being flat-lined for about a decade.

[wabuffo]

Charlie dumped 100% of DJCO's Hyundai Pfd 3 position (005389.KS) in the latest quarter ending 9/30.

 

Unfortunately that was unlucky timing. It’s up ~30% since then.  Really jumping tonight with reports of a Hyundai-Apple tie-up on EVs.

 

wabuffo

[manuelbean]

I was reading through the thread after watching/listening to Mathew Petterson presenting his findings on the software bizz and I haven't seen anyone here presenting solid arguments to counterpoint his findings.

 

Has anyone actually talked to customers? Employees? Do you know if he is right when he says that there's millions of dollars waiting at the end of the rainbow when the software is implemented? Because if he's right, it might just be an awesome time to get on board.

 

 

[wabuffo]

With respect to valuation of the software business or the thesis that there’s $50-$150 million of backlog?

 

Both of those facts are questionable, IMHO.

 

wabuffo

[manuelbean]

With respect to both. I'm new to the name so I may be missing many things here, but do you know of anyone who has ever dug into that business as Petterson has?

 

Do you know what the backlog is? How many counties have bought the software? How many licenses? For how much?

[wabuffo]

A few people (a recent VIC article author, Peterson, etc) have been very vocally expressing that they have dug up contracts supporting anywhere from $50 - $150 million in future run-rate recurring revenues.  I've researched many of these "hundreds of contracts", looked at the RFPs and examined the invoicing agreement exhibits myself.

 

Here's Cook County, IL (one of the largest municipal counties in the US since it covers much of Chicago and its northern suburbs).  I've attached the RFP page that highlights the license fees.  All that work in one of the largest municipal court systems for an annuity of $300 grand per year (with some renewal language).

 

 

Here's the page from Peterson's presentation where I believe he makes reference to "hundreds of contracts".

 

 

I mean - add it up.  You can see the Cook County job in this list.  For full year 2020,  the annuity stream was supposed to generate ....$1.4m per year!  If I add the large Australia job that many hold up as a prime example of their success - its up to $3 million.  If I quintiple this list of twenty projects to get to one hundred contracts - it looks pretty meagre ($30m) to me and a far cry from $150m.  I'm just not seeing $50-$150m of revenues as easily as Peterson does.

 

It looks like a reasonably sized MSA (Cook Cty IL, Orange Cty CA, Austin TX, Ft. Worth, TX) nets DJTech ~$150-$350 grand per year.  How many of these do they need to get to $50m-$150m?  Are there even that many large enough counties available?  Would TYL and other software firms just cede all that territory?

 

I think the only way this works is in a roll-up scenario.  But DJCO doesn't have the capital or managerial chops to pull that off.  They bought two (New Dawn, ISD) to add to their home-grown Sustain and couldn't handle anymore.  DJCO first started in the legal software business with its home-grown Sustain business in the late 90s.  They plowed tens of millions into it and never really got anywhere.  In 2011, IIRC they bought New Dawn and ISD.  I think at first they were going to try a roll-up strategy but seemed to have given up on that.  Frankly, they've spent over twenty years trying to make a go of the legal software business, spent $100m+ in cash and have yet to show a full year of operating profit.  So I don't know if they have the managerial skills to run a software business against bigger competitors like TYL.

 

And that brings up the issue of valuation.  Here's my back-of-the-envelope, reverse engineering of the Technology business from DJCO's current market cap.

 

This table may even understate the implied valuation of the software business.  The value of BYD has soared in just the last quarter.  Munger was selling some of BYD as recently as the Jul-Sep 2020 period at ~60 HKD.  If I assume BYD's real value is closer to that and adjust the table, it shifts even more implied value into DJ Technology.

 

 

Could DJCO work out at current prices?  Anything's possible.  But it doesn't look cheap to me and appears to be riding the wave of two hot trends in equities right now - SAAS and EVs.

 

But of course I could be wrong about all this.  I don't really like betting against Charlie Munger.

 

wabuffo

[MattR]

 

Could DJCO work out at current prices?  Anything's possible.  But it doesn't look cheap to me and appears to be riding the wave of two hot trends in equities right now - SAAS and EVs.

 

But of course I could be wrong about all this.  I don't really like betting against Charlie Munger.

 

wabuffo

 

I don't like DJCO at currenct prices as well. Thought about buying into them in November but well you get some you miss some. Personally I think you are on the point with them riding the SAAS and EV wave. Their investment in BYD was smart, yet current BYD valuations are quite high. I recently sold out of all my SAAS stocks, not because they aren't great products but most investors seem to value them based on their TAM (total adressable market) and not on their real growth power.

 

Nobody wants to bet against Charlie, he either makes a few moves in asset allocation or the DJCO probably will slip back once the SaaS hype tones down a bit. Recently saw the alumni interview with Charlie. While the host wasn't good Charlie made some great comments  so he is still sharper than most of the world.

[manuelbean]

A few people (a recent VIC article author, Peterson, etc) have been very vocally expressing that they have dug up contracts supporting anywhere from $50 - $150 million in future run-rate recurring revenues.  I've researched many of these "hundreds of contracts", looked at the RFPs and examined the invoicing agreement exhibits myself.

 

Here's Cook County, IL (one of the largest municipal counties in the US since it covers much of Chicago and its northern suburbs).  I've attached the RFP page that highlights the license fees.  All that work in one of the largest municipal court systems for an annuity of $300 grand per year (with some renewal language).

 

 

Here's the page from Peterson's presentation where I believe he makes reference to "hundreds of contracts".

 

 

I mean - add it up.  You can see the Cook County job in this list.  For full year 2020,  the annuity stream was supposed to generate ....$1.4m per year!  If I add the large Australia job that many hold up as a prime example of their success - its up to $3 million.  If I quintiple this list of twenty projects to get to one hundred contracts - it looks pretty meagre ($30m) to me and a far cry from $150m.  I'm just not seeing $50-$150m of revenues as easily as Peterson does.

 

It looks like a reasonably sized MSA (Cook Cty IL, Orange Cty CA, Austin TX, Ft. Worth, TX) nets DJTech ~$150-$350 grand per year.  How many of these do they need to get to $50m-$150m?  Are there even that many large enough counties available?  Would TYL and other software firms just cede all that territory?

 

I think the only way this works is in a roll-up scenario.  But DJCO doesn't have the capital or managerial chops to pull that off.  They bought two (New Dawn, ISD) to add to their home-grown Sustain and couldn't handle anymore.  DJCO first started in the legal software business with its home-grown Sustain business in the late 90s.  They plowed tens of millions into it and never really got anywhere.  In 2011, IIRC they bought New Dawn and ISD.  I think at first they were going to try a roll-up strategy but seemed to have given up on that.  Frankly, they've spent over twenty years trying to make a go of the legal software business, spent $100m+ in cash and have yet to show a full year of operating profit.  So I don't know if they have the managerial skills to run a software business against bigger competitors like TYL.

 

And that brings up the issue of valuation.  Here's my back-of-the-envelope, reverse engineering of the Technology business from DJCO's current market cap.

 

This table may even understate the implied valuation of the software business.  The value of BYD has soared in just the last quarter.  Munger was selling some of BYD as recently as the Jul-Sep 2020 period at ~60 HKD.  If I assume BYD's real value is closer to that and adjust the table, it shifts even more implied value into DJ Technology.

 

 

Could DJCO work out at current prices?  Anything's possible.  But it doesn't look cheap to me and appears to be riding the wave of two hot trends in equities right now - SAAS and EVs.

 

But of course I could be wrong about all this.  I don't really like betting against Charlie Munger.

 

wabuffo

 

That's an interesting argument. I'll be talking to Matt this week and I'll be sure to ask him about that.

[capitalg]

Two interesting comments from Munger in his shareholder letter (https://proxy.dailyjournal.com/Chairman%20Letter%20for%20FY2020.pdf):

 

At the end of point 3 with respect to marketable securities holdings, he says "shareholders should not expect any significant appreciation...anytime soon" - not sure if that is supposed to imply that they sold out of marketable securities, or if it means that given the run-up in markets it wouldn't be prudent to assume further increases in value.

 

In point 4, he states that the recent share price of DJCO's stock "was reached amid much speculative frenzy."  Seems he thinks the stock is overpriced.

[wabuffo]

This comment was very interesting:

The value of the marketable securities reached $260 million on December 31, 2020

 

Since we know that he did not sell any of WFC.USB, BAC, and PKX based on the recent 13F-HR for the period ending 12/31/20, my calculations tell me that he stopped selling BYD after selling some in the previous quarter.  That means my sum of the parts table upthread is accurate in assuming no sales of 1211.HK during the fourth quarter of calendar 2020.

 

capitalg - where did you find that Munger shareholder letter?  I didn't see it as part of the proxy document filed on the SEC website.

 

wabuffo

[capitalg]

I received as part of the electronic proxy communication from my broker this past week - there was a link to this page:

 

https://proxy.dailyjournal.com/proxy.htm

[wabuffo]

Thanks man

 

wabuffo

[KJP]

 

Here's Cook County, IL (one of the largest municipal counties in the US since it covers much of Chicago and its northern suburbs).  I've attached the RFP page that highlights the license fees.  All that work in one of the largest municipal court systems for an annuity of $300 grand per year (with some renewal language).

 

 

I believe the Cook County contract is only for the Public Defender's Office's internal case management system, not the case management system for the county court system itself.  Here's the contract:  https://opendocs.cookcountyil.gov/procurement/contracts/1418-13332.pdf

 

That's why it's only $300,000 while the Austin, TX contract is $1 million annually.  That being said, I agree the software business doesn't seem particularly cheap given its historical performance.

 

[Anglozurich]

Does anyone know if the AGM is live and is there a link? I can not see it on yahoo finance. Thanks

[coc]

Does anyone know if the AGM is live and is there a link? I can not see it on yahoo finance. Thanks

 

It's on Feb 24. It was on Feb 12 last year, you may have mixed the dates up. Will stream on Yahoo.

[coc]

Munger was selling some of BYD as recently as the Jul-Sep 2020 period at ~60 HKD. 

 

Can I ask how you arrived at that? Thanks in advance. I saw they sold $16M or so worth in the 4Q but I assumed it was the other Asian stock.

[wabuffo]

Can I ask how you arrived at that? Thanks in advance. I saw they sold $16M or so worth in the 4Q but I assumed it was the other Asian stock.

 

coc - you made the big mistake of asking me the equivalent of "what time is it?".  As my wife accuses me of - I am now going to tell you how the watch is made!  8)

Yes - they completely sold out of their South Korean-listed security (which I believe was Hyundai Pfd 3 - 005389.KS) but they also sold about 12.7% of their BYD position (1211.HK).  I can prove that via two methods.

 

METHOD #1:

DJCO gives the fair value in USD for its "Hong Kong listed security" in its 10-Ks.  Berkshire Hathaway Energy also lists its ownership of its BYD common stock holdings in its 10-Qs.  We can compare what DJCO reported as fair value during every September versus what BH Energy did and the indices (in terms of change of FV vs the Sep-17 baseline) match (at least through Sep. 30, 2019).  But they don't match in Sep 2020.  So that's our first clue that Munger sold some BYD.

 

Here’s the comparison table:

 

METHOD #2:

From the DJCO 13F for September 30, 2020 – we know that Munger did not sell any WFC, USB, BAC or PKX because these positions are unchanged from previous 13Fs.

 

In the 10-K for September 30, 2020, there is a new disclosure that DJCO is invested in 5 stocks – including one in a foreign currency.  But it used to be two stocks invested in foreign currencies, so one of the two foreign stocks must have been completely sold.  Five stocks means the four listed in the 13F (WFC, USB, BAC, and PKX) plus one foreign stock.  [click on any of these images to view it full-screen for better viewing]

 

 

Moving on to the marketable securities section of the 10-K, we can calculate that the adjusted cost basis of the stock(s) sold was $12.114 million.  We can do this from the: a) proceeds minus the realized gain, or b) comparing the adjusted cost basis before and after the sale.

 

 

In previous 10-Ks, the foreign currency risk section would list the adjusted cost basis for both the Hong Kong-listed stock and the South Korean-listed stock in US dollars.

 

The Hong Kong stock’s adjusted cost basis = $14.710 million

The South Korean stock’s adjusted cost basis = $10.249 million

 

 

Given the cost basis of the sale was $12.114 million and one foreign stock was 100% sold, it must mean that DJCO sold 100% of the South Korean stock.  But that would only account for $10.249 million of the $12.114 million adjusted cost basis of stocks sold.

 

That means that $1.865 million of the $14.710 million (or 12.7%) of the BYD position was also sold during the quarter.

 

quod erat demonstrandum.

 

wabuffo