I do not own ISS, but Bobbyvee suggested I look at it, and I...

I do not own ISS, but Bobbyvee suggested I look at it, and I like it, but . . .

ISS is a small firm, making less profit than Telstra’s Sol Trujillo is paid as a salary, but it is good to see a WA based company making a living via intellectual property, rather than simply gouging out hillsides for export to China.

Software is a funny business, its marginal cost of licensing one more licence is near zero, and hence if one grows licensing fees, the extra revenue drops to the bottom line. However, if one does not keep the software ahead of the pack, the business soon fades away. It was only yesterday when WordPerfect was at the top of the word processing pile, and nowadays one rarely hears of it, and this is true of many software products that I could rattle off, never mind computer firms like Burroughs, Honeywell, ICL, NCR, Nixdorf, Prime, Wang, Wicat et al.

Relative to firms that can hang around for decades, I would be inclined to discount a software house’s price earnings ratio (PER). Under the most favourable circumstances, I would be loath to use a PER greater than 16. Somebody probably said that to Bill Gates when he was a lad, or to others like Mr Goodnight of SAS – however, the contention would have proven to be true for most software firms, which are now no more.

ISS had for the most recent year a diluted EPS of 3.64 cents, and if we multiplied it by 16 we would get $0.5824, which is not too far from ISS’s current share price.

ISS could progress in leaps and bounds in coming years, and then simply run out of puff like most software houses of old seem to have done.