“All this automation and effective software is all going to happen, but it is unbelievably difficult” with respect to legal technology, remarked legendary value investor Charlie Munger at the 2020 annual meeting of the Daily Journal Corporation, which he chairs.
Though traditionally a legal publications house, the Daily Journal has, somewhat discretely, evolved into a LegalTech company, with over 70% of revenues generated by the court case management-focused Journal Technologies unit.
Though specific to that business, Charlie Munger’s commentary in many ways captures the zeitgeist for LegalTech more broadly. While, in the long run, automation and innovation represent the logical state of affairs for the legal world, that does not imply an easy path – and the ‘long run’ can be a long ways away.
Legal technology is at an interesting inflection point. On the one hand, sector maturation appears to be accelerating, as evidenced by rising valuations, capital inflows and even LegalTech-specific SPACs. Yet, due to a host of sector-specific factors, challenges remain and are likely to persist. “Hardware is hard” is an old saying amongst investors to explain their preference for asset-light software businesses, and while substantively distinct, LegalTech’s innate challenges may be of similar magnitude.
The Daily Journal’s development and Charlie Munger’s insights at its annual meeting provide a unique lens for assessing LegalTech’s challenges, while also highlighting its opportunities. Though, as Munger insightfully cautioned, success is “not going to be easy and it’s not going to be fast.”
Daily Journal: Background & Overview
The Daily Journal, as Charlie Munger explained, “started as a public notice rag . . . and morphed into a very successful legal daily newspaper” focused on publishing appellate opinions – “an ideal niche” for a “small but very profitable paper.”
Currently, the Daily Journal publishes 10 newspapers. The largest are the Los Angeles Daily Journal and San Francisco Daily Journal, established in 1888 and 1893, respectively, with 6,300 subscribers between them as of September 30, 2020. The company’s other titles include Daily Commerce, The Daily Recorder and the Inter-City Express. The revenue model is roughly 67% subscriptions and 33% advertising.
Secular shifts have put pressure on its business model and readership has declined. “Technological change is destroying the daily newspapers in America . . . The revenue goes away and the expenses remain and they’re all dying,” Munger explained at the annual meeting.
Along with an enviable portfolio of marketable securities, the Daily Journal has addressed these challenges by developing “a second business . . . to replace the economic strength of the newspaper that is imperiled and that’s Journal Technologies.” Journal Technologies “is a computer software business that helps courts and government agencies replace human error-prone inefficient procedures with simpler and better procedures run by software.”
Specifically, the unit “provides case management software and related services to courts and other justice agencies,” which “use the Journal Technologies family of products to help manage cases and information electronically, to interface with other critical justice partners and to extend electronic services to the public, including a secure website to pay traffic citations online, and bar members.” The product suite is organized into three core “eSeries” products, the best known of which is eCourt®.
Journal Technologies was developed through a disciplined M&A strategy, followed by extensive ongoing investment and R&D. The business was built through three primary transactions:
- 1999. The Daily Journal paid $6.67 million for 80% of Choice Information Systems, Inc., known for its Sustain family of court technology products including eCourt®.
- December 2012. The Daily Journal purchased, New Dawn Technologies for $14 million.
- September 2013. The Daily Journal paid $16 million for ISD Corporation which provides “case management software systems and related services.”
Late 2012 and 2013, as it happens, was the optimal time to purchase a LegalTech business. Those years marked the low point in LegalTech investment, but closely preceded a boom innovation and tech maturation. In other words, a quintessential value investment.
New Dawn, for instance, generated 2013 annualized revenue of about $12.7 million, with a small operating loss, implying a purchase price of around 1.1x forward revenues. In contrast, some LegalTech companies with comparable revenues have recently been reported to be valued at 50x their top line.
Daily Journal Business Evolution
The decade between 2011 and 2020 was a period of vast transition for the Daily Journal. The two critical, interrelated themes were the decline of the traditional business – where revenues shrank 53%, from 31.5 million to $14.7 million – and the ascendancy of Journal Technologies, which saw revenues grow 1082%, from $2.98 million to $35.25 million.
These themes are displayed in the chart below, which shows revenues for the Daily Journal’s two reporting segments: (i) the Traditional Business, composed of the newspaper operations and (ii) Journal Technologies.