Education IT Provider Blackboard Is Well Positioned For Growth

Brian Clionsky
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Over the past decade there has been a noticeable shift within the field of education and a strong push for continued integration of technology in education. The newly-elected administration understands this world-wide shift and understands America is currently behind the curve as far as education is concerned. To combat this, the administration is concentrating its efforts on increasing the quality of America’s education, resources for required for this education, and technology in the classroom. Thus, education IT seems to be a favorable sub-sector in the long run, and should experience growth in the future, well beyond that which it had previously seen with the emergence of the computer.

Within this subsector there are many small regional private companies along with some larger companies traded on foreign exchanges, but there are a few publicly-traded education IT companies traded on American exchanges which include Skillsoft plc (NASDAQ:SKIL), Renaissance Learning (NASDAQ:RLRN), and Blackboard (NASDAQ:BBBB). Skillsoft plc provides on-demand e-learning and performance support solutions for enterprises, government, education, and small and medium-sized businesses worldwide. Renaissance Learning provides computer-based assessment and periodic progress monitoring technology for pre-kindergarten through senior high schools and districts in North America. Its educational software products cover a range of subject areas, including reading, early literacy, mathematics, writing, vocabulary, and language acquisition. Blackboard provides enterprise software applications and related services to the education industry. Their products allow universities, schools, and corporations to support the learning environment through online teaching. Blackboard also provides ID and debit/credit card services. Blackboard is by far the best of these three companies as it dominates the course management market, possesses strong future growth drivers, and is the most innovative in terms of meeting the continually changing needs of its customers. I like Blackboard going forward for three main reasons: Overall educational IT trends, Innovation, and Market Dominance.

Overall Education IT Trends

Blackboard is experiencing increased demand for its product and services at all levels of education due to several factors. One such factor is the increase in popularity and reputation of online universities. Up until a few years ago, having an online degree was less impressive than one from a “brick and mortar” university. The tides have turned however, and enrollment at online universities is growing due to job losses in a tough economy and the flexibility of online learning platforms. Online universities and colleges are experiencing double-digit enrollment growth rates that should continue well through 2010 and 2011.

Another factor is that “brick and mortar” universities and colleges are now offering more online classes than ever before. Now students can take the same courses that were previously only offered in the classroom due to increased use of podcasts and streaming video. This offers both the student and teacher more flexibility on when the class can be taught/taken and presents the same material as the equivalent class taught in a classroom or lecture hall. In 2008 over 4.6 million students enrolled in at least one online course, an increase of 20% from 2007. This number is expected to rise by over 20+% in 2009 and grow as high as 35% by 2013. Colleges and Universities will continue to increase the number of online courses as it allows these colleges and universities to accept more students and be more flexible to both the needs of professors and students. Some may argue that the growth in online course enrollment is simply due to the overall growth of college enrollment, but, in 2008 there was only a 1.2% increase in the higher education student population overall.

In the United States we are experiencing increased use of technology in high schools, middle schools, and elementary schools. In high school specifically, there is an increased focus on gaining college credits and college preparation which includes online coursework and the use of online applications. Blackboard also provides parents with peace of mind and allows for quick and up-to-date reporting on their child’s performance. Parents of 1 in 5 U.S. K-12 students receive messages from the Blackboard Connect Mass Notification System to notify them on how their children are performing in the classroom, which is an astonishing figure as less than half of all US K-12 institutions are currently using online platforms.

Public schools are continuing to add computers and technology into the curriculum. The current Student to Computer Ratio for public schools has seen significant decreases over the past 11 years. In 1996 the Student to Computer Ratio was 63:1. In 1999 the ratio fell to 5:1, and in 2007 the ratio dropped even further to 3.8:1. Many schools now even have ratios close to 1:1. Internet access is becoming more available for students in grades K-12 across the country as well. This computer to student ratio will continue to get smaller as we continue to see the emergence and use of technology and computers as a tool of learning which is starting at earlier ages, and is some cases as early as Elementary School. Also, we are seeing an increase in the number of specialized technology and science middle and high schools both at the private and public level throughout the country.

Barack Obama’s administration is very focused on education and bringing America’s standards of education closer to that of foreign countries such as China and Japan. To do this, Obama plans to create an innovative schools fund, offering funds to districts with a diverse portfolio of schools. Obama hopes that this will lead to many more schools specializing in the Arts and Technology. He believes that America must integrate a range of technology applications into our nation’s schools in order to shift the learning curve and put America back at the forefront of educational standards.

Obama noted that this means America will have to go above and beyond specific school specializing in technology and students in all US schools should be trained to use technology to research, analyze, and communicate. Obama plans to use the Technology Investment Fund as a means of integrating technology in the classroom. This is where Blackboard and others within the IT education subsector will benefit greatly. Blackboard received over $3.2M in government contracts and funding in 2007 and this number should grow significantly given the current administration’s plans for technology and education.

Innovation

Blackboard has continued to release ahead of the curve technology and innovations, making their learning suite software more accessible, more user friendly, and the most innovative of its kind. Blackboard listens to the needs of its clients and continues to refine its products and services to grow in-line with current technology trends, like the continued push for mobilization. Blackboard Learn just recently released an iPhone/iPod Touch Application. This application will allow students to access all of their course information on-the-go. Students can work on their coursework when and where it is most convenient for them. This new technology can also be used with online courses that use podcasts to give the online class an “in-class” feel as the iPhone and iPod Touch are both compatible with podcast videos. Blackboard also just released a Facebook application that will enable students to receive important notifications on Facebook when new grades, assignments, and discussion posts are available for their online courses.

Building Blocks and Power Links allows institutions to add functionality to the Blackboard Learn platform, and makes it possible for external applications to interface with Blackboard such as turnitin.com, a popular website that checks students’ works for plagiarism. Blackboard Transact provides campuses with ID cards, meal plan and debit/credit account administration, cashless payments, and attendance tracking at events and classes. Blackboard Transact is an effective ERP system that captures student data and provides reports that help analyze student tendencies for universities to use and help refine student life. Blackboard Connect allows better communication between government agencies, colleges, and the military by sending alerts, surveys, and notifications to thousands of people instantly over the phone by voice or text message. Blackboard also just launched an instant messaging system for its Blackboard learning suite.

Market Dominance

Blackboard is the leader of its industry and controls 75% of the course management software market as of 2007. Blackboard does business with over 29% of all US universities including 75% of the top 129 Universities. For example, the University of Texas uses the Blackboard Learning Suite and has seen a huge influx in the number of online classes they offer. In the fall of 2000 the University of Texas only offered 70 courses, but by the spring of 2007 the number of only courses offered grew to 3,891 courses. This is an increase of 5458.5% in just 7 years and that number will continue to grow. Similar growth figures have been seen at other colleges and universities of all sizes and accreditation levels.

Blackboards mix of a solid business model and innovative products help to lock in customers and lock out its competition. Recurring revenue makes up 75% of the company’s top line revenues and Blackboard’s customer renewal rate was 92% in 2008. This is an astonishing satisfaction rate, one that leads the education IT industry. Blackboard has seen its total number of software licenses increase over 55% from 2007 to 2008 and has experienced increases in total number of licenses under its control during the past eight quarters straight. Blackboard’s contract value has also seen tremendous value growth, up 18% from 2007 to 2008.

There is some concern with patent invalidation as Blackboard has recently had 44 of its technology patents deemed invalid. However, this does not affect Blackboard’s operating business or the technology Blackboard employs but it does affect Blackboard’s barrier of entry for new competition in the market. However, given the market dominance of Blackboard currently, this does not appear to be a meaningful threat.

Fundamentals

Fundamentally speaking Blackboard is very sound and seems like a steal. It appears to be undervalued with a PEG ratio of 0.8 and with a beta a little over 1.0 appears to have a lot of upside potential. Blackboard is an impressive growth play that contains some stability within the industry as Blackboard has a market cap around $900 Million making Blackboard the largest corporation of its kind. Blackboard has industry leading EV/Sales and EV/EBITDA margins of -27.16% and -15.10% respectively, as well as an expected EPS growth rate of 24.2% and EBITDA margin of 16.55%. Blackboard also has very impressive 5 year CAGRs leading the industry with a Revenue CAGR of 25.4%, EBIT CAGR of 31.3%, and EBITDA CAGR of 46.2%.

The Final Exam

Blackboard is an all around A+ with a high growth potential. Blackboard will help diversify your IT portfolio and help gain exposure to an industry that America cannot afford to ignore: education. The future of America’s youth and America’s long-term economic health depends upon continued integration of technology in the classroom and increased educational standards, and Blackboard will be on-board for this ride.

Disclosure: The Fund the author is associated with has interests in purchasing BBBB.

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