Scientific Learning Corporation (NASDAQ:SCIL) is the perfect example of a company that provides a pretty good product yet struggles with profitability. The company creates educational software that consists of exercises for the human brain. At first, you might think, “Exercising the brain – who in the world would need this?” What about students who struggle with learning or students who have a hard time staying focused? Schools that care about increasing the performance of their students are the perfect clients.
While the efficacy of Scientific Learning’s products may be difficult to measure, and any positive effects may be more apparent in the long term than in the short term, there is a market for this type of product. One of the company’s biggest strengths is that its product line is differentiated from other educational software in that it focuses on improving skills that help facilitate learning as opposed to focusing on particular subjects such as history, mathematics, or English. For example, one of the exercises in their Fast ForWord Language to Reading and Literacy Advanced program assists students in improving accuracy and increasing the rate with which they process letter-sound correspondence, which leads to automaticity in reading skills.
There are two components to successful learning: 1) proper instruction and curriculum, and 2) capable and willing students. Traditionally, schools have mainly focused on curriculum and have not placed as much emphasis on making sure that students have the ability to receive and learn new information. This is where brain fitness comes in and Scientific Learning Corporation helps students with just that.
The products have received positive reviews from educators, and the company has recently become an approved vendor for Michigan schools. Eligible school districts can use American Recovery & Reinvestment Act (ARRA) School Improvement Grants (NYSE:SIG) funds to purchase products from Scientific Learning Corporation.
The company was founded by a neuroscientist from the University of California San Francisco and Rutgers University. In 1995, it incorporated in the State of California under the name Scientific Learning Principles Corporation, and in 1997, it reincorporated in the State of Delaware under the name Scientific Learning Corporation.
The company started operating in February 1996, but it did not generate any revenues until the first quarter of 1997. In July 1999, it became a publicly traded company.
When the company went public, it issued shares at $16 per share and within several months, these shares were trading as high as $40 per share, making shareholders very happy. Unfortunately, ten years later, the stock was trading below $2 per share. This must have been a painful experience for those who lost 95 percent of their capital, assuming they purchased it for $40 per share and held onto it for ten years.
However, it is no surprise that the price of the company’s shares deteriorated over the years because in the long term, stock prices follow the fundamentals. And ever since its first revenues in 1997, the company only showed positive operating income during 3 out of 13 years.
Originally, the price appreciated from $16 to $40 after the initial public offering because investors were excited about the company’s product and its future potential. It is easy to do that even today because one can dream about how this wonderful product can solve our country’s educational deficiencies. Once public schools find out about this product, they will rush to place orders and the product will fly off the shelves. This might be the dream, but the reality is different.
When I first learned about the company’s products, I saw that it has the potential to be helpful to students; however, I said to myself that I would not want to be the salesperson responsible for selling it. I imagined myself walking into the office of a school district decision maker and pitching it, “Mr. or Ms. Decision Maker, I am here to tell you about a wonderful product that will help your struggling students perform better by exercising their brains.” He or she would likely smile, agree with me, and never purchase it, whether because of an attachment to traditional methods, bureaucracy, or for other reasons. Plus, public schools are funded by taxpayers’ dollars and they usually struggle to have enough money. After paying for traditional products and services, there might not be much left for brain exercises. Consequently, it does not surprise me at all that Scientific Learning Corporation has been struggling for years with achieving sustainable profitability.
Next time you fall in love with any company’s products or services, think if it could actually be sold at a profit. Put yourself in the position of the salesperson and imagine if you would be successful selling it, assuming you have the ability to sell. Then, put yourself in the shoes of the customer and imagine if you would want to buy it and why. If investors went through this simple analysis, they would save themselves from a lot of pain and frustration.
Disclosure: The author does not own SCIL