Very positive about this stock myself and will continue to hold....

Very positive about this stock myself and will continue to hold. As an inexperience investor I find it's always good to be reminded of the potential risks though:

http://blog.intelligentinvestor.com.au/doddsville/roll-up-for-rubik/

Roll up for Rubik

Roll-ups are acquisition-based strategies, where a company issues stock or borrows heavily to acquire similar, smaller businesses. As the company grows it can extract higher savings from suppliers, cut overheads and increase prices as it eliminates the competition. Once investors grasp the growth story and realise the potential for rapid gains these stocks can quickly become stock market darlings.
Rubik Financial is a roll-up of financial services technology businesses that emerged in 2008 from the ashes of Ausron, a former operator of timber managed investment schemes.
Rubik’s chief business was originally a ‘Bank-in-a-box’ software system aimed at small authorised deposit-taking institutions, such as building societies and credit unions.
Rubik aimed to save customers 30% on their IT expenses and help them reduce their cost to income ratio by 10%. The system is web-based so it can be accessed anywhere there’s internet access. And because all customers use the same system, updates and additional services can be added easily.
This is a monumental change. Now, instead of paying the likes of Oracle and Hewlett Packard huge amounts for hardware and tailored software, customers only pay for what they use plus an annual subscription fee. This is what’s known as ‘software as a service’, and it provides Rubik with high-margin recurring revenue.
Rubik estimates its potential market is $150m, some 15 times bigger than its current revenue of $10m. Still, the Australian market is quite small. And because of security concerns and the disruption of installing and learning how to use a new IT system, potential customers have been reluctant to switch and cede control of their IT systems. Companies like Rubik typically store their systems efficiently at a data warehouse or ‘server farm’ managed by companies like Vocus Communications so they don’t have to invest huge amounts in hardware.
The Banking division also produces reliable revenue from ancillary services related to mobile banking, credit cards and bulk payments, but it’s barely breaking even and isn’t expected to grow quickly. We wouldn’t be surprised if the division was sold if Rubik’s Wealth division became more profitable.
In 2012 the company purchased the financial planning software business COIN from Macquarie Group for $26m. A distant second in market share behind Iress’s Xplan, COIN allows an army of planners at big institutions like AMP to manage their clients’ accounts, with increasingly onerous compliance requirements and an ever-changing and bamboozling array of investment options.
Rubik’s pricing model is similar to the Bank-in-a-box model, but in a classic catch-22 the biggest challenge for Rubik could be the structural changes in the financial planning industry.
Rubik stands to benefit from an increase in limited scope advice (more on that below), but this means there will be little growth (if any) in comprehensive financial planning advice. There could also be fewer kickbacks for recommending certain products or investments, which means AMP might no longer be able to incentivise and support such a large army of well-paid planners.
This risk is particularly acute for Rubik due to its highly concentrated customer base. Australia’s five largest financial planning groups represent over 40% of all planners and Rubik’s largest customer provides 18% of revenue.
Late last year Rubik acquired Provisio for $4m, as the new FOFA (Future of Financial Advice) reforms are expected to encourage limited scope advice. Rather than paying a financial planner for comprehensive management of your financial affairs you should have more opportunities to just pay for what you use.
Provisio is designed to produce a statement of advice showing the results of various investment options quickly, while meeting the increasingly onerous compliance rules governing the financial planning industry. In the same way COIN counts four of Australia’s five biggest financial planning groups as customers, Rubik will be hoping Provisio is also a hit given its audacious goals.
The company expects to rapidly increase profits through a mixture of new products, signing up new clients and more acquisitions.
The potential range of outcomes for Rubik is wide, but one swing factor amongst many will be whether it issues significantly more of its highly priced shares to pay for further acquisitions.
Rubik is well placed to benefit from tailwinds including the switch to the cloud (or ‘software as a service’) and the increasing compliance burden on financial planners, but there’s no telling what this company will look like in five years.
Roll-ups are also risky, often ending up collapsing under a mountain of debt and intangible assets after overpaying for acquisitions – as was the case with ABC Learning Centres for example. To make money from a roll-up you need to get in early and leave before the music stops, but occasionally there’s money to be made investing after the initial blow-up, which explains our recommendation of Vision Eye Institute.
If Rubik achieves its lofty goals we can easily imagine making 15%+ annualised returns over the next few years and beyond. But to get involved in such a speculative situation we’d either need a lower share price to increase our margin of safety or an improved performance to show the company’s strategy is working. We’ll follow the stock in case an opportunity presents itself, but for now it’s AVOID.