Commentary: Renaissance Capital eyes software firm
By Renaissance Capital
Last Update: 9:49 AM ET June 15, 2004  
 
 
Editor's Note: Renaissance Capital runs the IPO Plus Fund (IPOSX: news, chart, profile). The fund may have investments in the securities mentioned in its report. For more information, see the company's Web site at www.ipohome.com.

GREENWICH, Conn. (CBS.MW) -- When college students submit papers, check grades or collaborate online, chances are they are using Blackboard's enabling technology.

Founded by two young consultants from KPMG involved in developing online learning technical standards for a consortium of universities, Blackboard (BBBB: news, chart, profile) has become the leading online course management software firm serving the higher-education market.

The company has leveraged its access to 12 million students to develop other products such as an information portal to university activities (for example "My Georgetown"). It has also introduced a related commerce platform for student debit transactions both on and off campus.

With the proliferation of wired campuses, Blackboard entered the education software market with the right timing. Instead of asking a university to put down upfront money on an expensive, high-maintenance software system, Blackboard offers an appealing subscription-based approach that grows based upon the number of student users. Colleges have embraced the concept with 1,100 on board.

Blackboard has a 46 percent share of the online learning systems market. Others include private firm WebCT with 35 percent market share and public company eCollege.com (ECLG: news, chart, profile) with a 4 percent share. Blackboard believes it has only tapped 17 percent of the addressable market.

Blackboard's peer group includes Plato Learning (TUTR: news, chart, profile), recent IPO Universal Technical Institute (UTI: news, chart, profile), Strayer Education (STRA: news, chart, profile), Career Education (CECO: news, chart, profile), Apollo Group (APOL: news, chart, profile) and University of Phoenix Online (UOPX: news, chart, profile).

The educational service stocks are darlings among investors seeking non-cyclical growth.

With $100 million in sales and growth of 20 to 25 percent, Blackboard's financial results are strong. Thanks to upfront subscriptions, no working capital is needed and with computer infrastructure in place, capital spending is low. The result is $15 million in free cash flow.

Blackboard's sales multiple, at 3.2 times, is less than half the multiple of eCollege.com, and Blackboard's sales are actually higher than reported due to its subscription model. Blackboard receives upfront payments on a large number of sales that are deferred on its balance sheet ready to be booked to revenue over the next year.

There are risks. Five venture firms, including Carlyle Group, own larger stakes than management and will surely want to monetize their investment at the earliest opportunity. Also, to get to today's profitable position, the company lost $132 million in prior years. School budget cycles result in several weak quarters each year.

While the company has not yet reported a full year of GAAP profitability, with strong investor interest in the education stocks and its superior cash flow, investors will have no problem getting on board with Blackboard.
 

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