On the Board (BBBB)
Well, while reading up on Blackboard, Inc. (Nasdaq: BBBB) this afternoon I put in what I thought was a fairly low limit order for a small entry position ... and as a result, I'm now the proud owner of a few shares of BBBB. I picked up my shares today at $28.26, a hair under my $28.30 limit order.
I spent a few paragraphs going over what I liked about BBBB and Pearson (NYSE: PSO) earlier today, so I won't rehash all that. Suffice to say that I think Blackboard's dominant position in academic enterprise software and course management software has them well positioned for several years of excellent growth ... once they have gotten over the speedbump of their WebCT acquisition, the costs of which should be pretty well absorbed by next fiscal year.
That's what I like about Blackboard's business model ... they want to be, in their words, "the operating system for education", a boom market, and they're headed in that direction. What about the numbers?
BBBB is going to have very low or nonexistent earnings this year, depending on whether or not you account for the costs of their WebCT transaction ... so we're not buying them for current earnings, and they don't pay a dividend.
What we're buying is growth. They see 31,000 or so institutions as being their addressable market, including the major categories of U.S. higher education, International educational institutions, and U.S. K-12 schools. They believe that this sector spends $28 Billion a year on IT, so if they can get a growing chunk of that business they'll certainly become a much larger company in the years to come (their market cap today is about $780 million and they had sales of $135 million last year).
They currently have 3,600 clients, many of whom are small customers that are prime candidates for upselling to enterprise-level services, including the 1,400 oof those who were WebCT clients that now have a much richer product menu to choose from. Blackboard says that WebCT's average client contract was worth, $24,000, while the average Blackgoard contract is $45,000 -- that gives them some great room for internal sales growth. And their customers renew at close to a 90% rate, which means excellent potential for ongoing revenue growth.
The acquisition is what's holding Blackboard back right now because of the unexpectedly large accounting costs associated with it -- costs that will keep the acquisition from being accretive for a couple years, and that were the reason for BBBB's recent swoon on their downgraded forecasts (though the combined company will be cash earnings accretive next year). I do like that they used cash and debt for the acquisition and didn't dramatically dilute the existing shareholders -- that's one argument for large management ownership.
BBBB disappointed folks with their downgraded guidance earlier this Winter, but in the long run they see themselves growing quite dramatically. From sales of $135 million in 2005 they're expecting to hit about $170 in 2006 and $220+ in 2007 ... that is close to 40% growth in sales by my reading (that doesn't account for some costs), so this is a very nice underpinning to what should eventually become a capacity for dramatic increases in earnings. This is, after all, a software company -- once the acquisitions costs are digested, earnings should be able to grow substantially as margins build along with sales. They're projected fiscal year GAAP income of .31-38 per share in FY 2007, which would give them still a relatively high forward PE of 75+ ... but they're projecting cash earnings per share, which takes out the accounting costs, of over $1 in 2007, which tells me that's when they think they're really going to be hitting their stride.
I'm glad to be in with a small portion now, but I also think that BBBB could fall significantly from here -- perhaps as much as 20-40%, though I don't guess it will be that severe. If it does and their long term prospects still seem solid, that's when I'd like to fill out my position.
Why might it fall? Well, this is impossible to predict -- but they're going to continue reporting losses for several quarters to come unless they've been seriously sandbagging their projections, and that's quite likely to impact the shares negatively even if we're all expecting losses.
And this is a relatively young company and a small one, acquiring a company that is not that much smaller than themselves. It's certainly possible that they're underestimating the costs they'll incur in the transition or the problems they might have with their 1,400 new customers.
But I look at their projections, which I think are lower than the market might make possible given the boom in education and the dramatic need for the services BBBB offers, and I see a lot to like.
They project growth from FY 2006 to 2007 as follows:
Revenue: 18%
Expenses: 14%
EBIT: 27%
Pro-forma net income: 51%
Pro forma cash net income including taxes: 44%
That's excellent growth, and it shows that they think they'll be able to take good sales growth and transform it into great bottom line growth (assuming you ignore the men behind the curtain, debt payment on their loan for the acquisition, and stock-based compensation -- since this reflects what I think the long term operational performance of the company can be, I'm OK with the pro forma nonsense).
They are diluting shares, but not massively -- they paid for the acquisition with cash and debt, so it looks like we're going to see average share count go up by perhaps 4-5% a year ... not ideal, and I'd like to see that number come down, but not outrageous for a software company.
So, I wouldn't be surprised if I'm buying a little too early here, but I think 2007 and beyond will be extremely strong years for Blackboard -- I'll hold my entry position and hope for some significant declines to present themselves as more lucrative buying opportunities.
I spent a few paragraphs going over what I liked about BBBB and Pearson (NYSE: PSO) earlier today, so I won't rehash all that. Suffice to say that I think Blackboard's dominant position in academic enterprise software and course management software has them well positioned for several years of excellent growth ... once they have gotten over the speedbump of their WebCT acquisition, the costs of which should be pretty well absorbed by next fiscal year.
That's what I like about Blackboard's business model ... they want to be, in their words, "the operating system for education", a boom market, and they're headed in that direction. What about the numbers?
BBBB is going to have very low or nonexistent earnings this year, depending on whether or not you account for the costs of their WebCT transaction ... so we're not buying them for current earnings, and they don't pay a dividend.
What we're buying is growth. They see 31,000 or so institutions as being their addressable market, including the major categories of U.S. higher education, International educational institutions, and U.S. K-12 schools. They believe that this sector spends $28 Billion a year on IT, so if they can get a growing chunk of that business they'll certainly become a much larger company in the years to come (their market cap today is about $780 million and they had sales of $135 million last year).
They currently have 3,600 clients, many of whom are small customers that are prime candidates for upselling to enterprise-level services, including the 1,400 oof those who were WebCT clients that now have a much richer product menu to choose from. Blackboard says that WebCT's average client contract was worth, $24,000, while the average Blackgoard contract is $45,000 -- that gives them some great room for internal sales growth. And their customers renew at close to a 90% rate, which means excellent potential for ongoing revenue growth.
The acquisition is what's holding Blackboard back right now because of the unexpectedly large accounting costs associated with it -- costs that will keep the acquisition from being accretive for a couple years, and that were the reason for BBBB's recent swoon on their downgraded forecasts (though the combined company will be cash earnings accretive next year). I do like that they used cash and debt for the acquisition and didn't dramatically dilute the existing shareholders -- that's one argument for large management ownership.
BBBB disappointed folks with their downgraded guidance earlier this Winter, but in the long run they see themselves growing quite dramatically. From sales of $135 million in 2005 they're expecting to hit about $170 in 2006 and $220+ in 2007 ... that is close to 40% growth in sales by my reading (that doesn't account for some costs), so this is a very nice underpinning to what should eventually become a capacity for dramatic increases in earnings. This is, after all, a software company -- once the acquisitions costs are digested, earnings should be able to grow substantially as margins build along with sales. They're projected fiscal year GAAP income of .31-38 per share in FY 2007, which would give them still a relatively high forward PE of 75+ ... but they're projecting cash earnings per share, which takes out the accounting costs, of over $1 in 2007, which tells me that's when they think they're really going to be hitting their stride.
I'm glad to be in with a small portion now, but I also think that BBBB could fall significantly from here -- perhaps as much as 20-40%, though I don't guess it will be that severe. If it does and their long term prospects still seem solid, that's when I'd like to fill out my position.
Why might it fall? Well, this is impossible to predict -- but they're going to continue reporting losses for several quarters to come unless they've been seriously sandbagging their projections, and that's quite likely to impact the shares negatively even if we're all expecting losses.
And this is a relatively young company and a small one, acquiring a company that is not that much smaller than themselves. It's certainly possible that they're underestimating the costs they'll incur in the transition or the problems they might have with their 1,400 new customers.
But I look at their projections, which I think are lower than the market might make possible given the boom in education and the dramatic need for the services BBBB offers, and I see a lot to like.
They project growth from FY 2006 to 2007 as follows:
Revenue: 18%
Expenses: 14%
EBIT: 27%
Pro-forma net income: 51%
Pro forma cash net income including taxes: 44%
That's excellent growth, and it shows that they think they'll be able to take good sales growth and transform it into great bottom line growth (assuming you ignore the men behind the curtain, debt payment on their loan for the acquisition, and stock-based compensation -- since this reflects what I think the long term operational performance of the company can be, I'm OK with the pro forma nonsense).
They are diluting shares, but not massively -- they paid for the acquisition with cash and debt, so it looks like we're going to see average share count go up by perhaps 4-5% a year ... not ideal, and I'd like to see that number come down, but not outrageous for a software company.
So, I wouldn't be surprised if I'm buying a little too early here, but I think 2007 and beyond will be extremely strong years for Blackboard -- I'll hold my entry position and hope for some significant declines to present themselves as more lucrative buying opportunities.
This article posted by One Guy @ 4/07/2006 04:57:00 PM 0 comments
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